With the holiday shopping season putting an extra pinch our wallets, those zero percent credit card balance transfer offers may look especially tempting this time of year. A strategic balance transfer could provide you with the breathing room you need to catch up on your bills. On the other hand, if you are still busy racking up huge amounts of debt and don’t have a plan to pay off those balances in a reasonable amount of time, transferring the balance to another credit card may do more harm than good.
To truly benefit from credit card balance transfers, keep these five important factors in mind:
1. Promotional Period. When you get that zero percent interest balance transfer offer—or a similar super-low interest rate—make sure you’re aware how long that interest rate will apply to your account. Some credit card issuers run short promotional rate periods in hopes of attracting new customers. Once that period expires, you may end up paying a higher interest rate on the new balance than you were paying on your previous credit card.
2. Transfer Fees. Most balance transfer offers involve some type of fee—either a flat fee per transfer, calculated as a percentage of the balance transferred, or a combination of both. Read the fine print carefully to determine what the total costs of initiating the balance transfer would be, as high fees can sometimes offset the anticipated savings from a lower interest rate.
3. New Credit Limits In many cases, you won’t know what your credit limit on the new card is until the issuer processes and approves your application. When you apply for the balance transfer offer, you may be opening a new credit card account with a less desirable credit limit.
4. Impact on Credit Score Many people who enter a new credit card balance transfer offer are under the assumption they will simply close the account on an old card after transferring the balance to a low-interest card. However, it’s important to consider the impact on your credit score. Canceling a high-interest credit card that you no longer have use for will have a negative impact on your credit score, since it will reduce your credit utilization ratio—a key factor in calculating your credit score. Consider keeping the account open so you maintain the available credit line.
5. Changes in Spending Habits If the primary reason for transferring your balance is to free up available credit on an existing card, you may be setting yourself up for serious debt problems. Avoid the temptation to transfer a balance simply to rack up more debt on the new card or on an existing card, as transferring credit card balances should never be used as a license to spend more.
The intended benefit from the balance transfer should be a reduced interest rate on an existing balance, so that you can pay off the balance as quickly as possible. This may very well mean that you need to adjust your spending habits and cut back on any or all credit card spending until that balance has been paid off. Opening up new credit lines, and spending even more on credit than you did previously, can take you down the path of financial ruin. Not only will you be faced with higher monthly payments and more interest charges, but you’ll see your credit score drop as you increase your debt load.
Sabah Karimi is a financial columnist for Wise Bread, where you can find additional information on the best zero percent balance transfer credit cards.