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Key takeaways
Balance transfer credit cards can help you get out of high-interest debt quickly and efficiently.
There are several pitfalls to avoid that can end balance transfer periods early, costing you money and potentially hurting your credit.
As long as you follow the rules of smart balance transfer behavior, these products can work to your advantage.
Balance transfer credit cards with 0 percent intro APR periods are among the most powerful tools available to consumers saddled with high-interest debt. With these cards, you can shift debt that is costing you a small fortune in fees to a new account that won’t charge you any interest on those balances for a fixed number of months.
Although the savings can be tremendous, you must approach the process in the right way. Errors can cause the benefits of making the switch to erode or disappear entirely.
Here are eight balance transfer mistakes that you definitely want to avoid.
1. Applying without checking if you qualify
Every time you submit a credit card application, the lender notifies the credit bureaus and adds a hard inquiry to your credit file. Such inquiries remain on your credit report for two years and are calculated into your credit score, typically for one year. According to myFICO, this usually appears as a deduction of up to five points from your score. So the more hard inquiries performed, the lower your credit score dips.
For FICO scores, hard inquiries fall under the “new credit” category, which makes up 10 percent of your credit score. If you don’t have much on your credit report or your scores are already on the lower end of the scale, an abundance of hard inquiries can have a particularly strong, negative impact.
That’s why, if possible, it’s important to prequalify for a balance transfer card before submitting the application. Prequalification gives your potential lender permission to run a soft credit check and determine your eligibility without affecting your credit score. It won’t trigger a hard inquiry and it doesn’t guarantee approval. It does, however, share the following critical details which could help you make your final decision:
When you prequalify with multiple lenders, you can compare the terms of different balance transfer cards to find a card and offer that fits your needs. Most credit card issuers require at least a “good” credit score to qualify for a balance transfer card.
If you’re concerned about your credit standing, prequalifying could help you identify a credit card issuer who’s more likely to approve you. Skip this balance transfer mistake to avoid wasting time (and precious hard inquiries) on lenders who are less likely to approve your application.
2. Assuming you can transfer all of your debt to one card
When transferring debt to a new balance transfer card, keep in mind you may not receive a high enough credit limit to wipe it out completely. Your credit limit is determined using several factors, including:
Each credit card issuer calculates your credit limit differently, so you may be approved for a credit limit on your new balance transfer card that’s lower than the debt you need to transfer. For example, let’s say you have $10,000 worth of debt on a few credit cards, but you’re granted a credit limit of $5,000 on your new balance transfer card. That means you’re restricted to a partial balance transfer for just half of your debt.
In some cases, issuers limit the amount you can transfer to a certain percentage of your total credit limit — often about 75 percent. Other issuers may cap the total amount of money you can transfer within a certain period of time, while some issuers may enforce limits on both.
Furthermore, don’t fall into the trap of trying to transfer debt from one card to another card from the same issuer. Most issuers won’t allow you to move debt between their cards.
3. Making a late payment on the new card
When agreeing to a balance transfer card, you are also consenting to the issuer’s terms and conditions. After doing a balance transfer, one of the largest expectations is that you make your payments on time. The consequences of just one late payment means your balance transfer could become far more expensive instead of saving you money.
If you are late, the 0 percent intro APR arrangement will end prematurely. If you paid a balance transfer fee already, you likely won’t get it back. Plus you’ll probably see a late fee assessed on your statement.
To sour the problem even further, the issuer may also impose a punitive interest rate for a few months, which is even higher than the regular rate. Read the terms and conditions of the card to know what that rate will be and how it will be applied.
4. Running up debt on the old card
After you transfer your debt to the new card, the original card will have an open credit limit, meaning you can make charges. While doing so can be temporarily helpful, especially if you will be earning rewards when you make those purchases, you should take pains to pay the bill in full every month. If you don’t, the debt can creep up, interest will be added and you may find yourself in a worse financial position than when you started.
Not only will you have a balance on the new credit card, but also on the first. That can add stress to your budget as you try to make the payments. Additionally, the escalating debt can hurt your credit utilization ratio, causing your credit score to decline.
5. Not having a payoff plan
Balance transfer cards can help you get out of debt quickly and cheaply. To do that, you need to have a payoff plan.
Review your budget to determine how much you can dedicate to the debt payments on a monthly basis. Then grab a calculator to determine how long it will take you to pay off the debt. Try using our Credit Card Payoff Calculator for help.
You should arrange the payments so you are out of debt before the intro 0 percent APR period ends. For example, imagine you have a $5,800 balance on a new card that gives you a 0 percent intro APR for 15 months. To zero the debt out in that time frame, you will need to pay a minimum of $387 each billing cycle. Set an automatic payment for that sum so you never miss a due date.
Without a payoff plan, you may make payments that are too small to keep pace with the zero interest period. That could leave you with a remaining balance and accumulating interest after the expiration date strikes.
6. Neglecting the fee in your analysis
Almost all balance transfer credit cards involve an initial balance transfer fee. The credit card issuer that inherited your debt from another account will usually charge between 3 percent and 5 percent of the balance. Therefore, on a balance of $8,000, your balance transfer fee could be $240 to $400.
Are balance transfers a good idea if the fee is that high? The fee is usually worthwhile, but be sure it makes sense before making a decision because it will add to your overall debt balance. If you can make large payments and get out of debt on your own in a few months, a balance transfer credit card may not be the best option.
7. Using the card while you’re paying off the transferred balance
For balance transfer credit cards, the 0 percent intro APR applies to the debt you move over. In many cases, you’ll be charged the standard APR for purchases (unless the card offers an introductory APR on purchases as well) and an even higher cash advance APR if you take a withdrawal on the card. So if you assume you can enjoy the zero-interest period on everything, think again.
As long as you have enough available credit, you can make purchases with your balance transfer card. Beware, however, because using the new card while you are in repayment mode can complicate the process. With a carefully developed payoff plan, you’ll have a debt payoff date to strive for. However, if you make more purchases, you’ll have to compute payments for those transactions too.
A better plan is to use a different card for transactions until the debt on the balance transfer card is paid off. If you want to make partial payments, find out what the APR is on all your cards and use the one with the lowest rate.
8. Adding loan debt without thinking it through
Personal loans can have very high interest rates, so you may be tempted to move what you owe to a balance transfer credit card, instead. Unlike credit cards, however, installment loans are not included in your credit utilization ratio — they are their own separate factor. So converting loans into revolving balances can increase your credit utilization rate and possibly result in a lower credit score.
The amount you have to pay to get out of debt each month may rise dramatically too.
For instance, payments on a $10,000 loan with a 5-year term and an interest rate of 6 percent will be about $194. Assuming you pay it down to $9,000 and move that loan — now including an estimated $360 fee — to a balance transfer card with a 0 percent intro APR for 15 months, the payments would rise to $624 in order to get out of debt with no extra fees.
If you can handle the higher payment, the arrangement may be beneficial. But if you can’t, you may put yourself in a tight spot.
The bottom line
Balance transfer credit cards can give you many months to manage debt without worrying about added interest increasing the liability. You just have to treat these products carefully and go into it with a plan. With a little attention and know-how, you can avoid some common balance transfer mistakes and come out ahead.
