It’s exciting to get the credit card offer in the mail. It says you’re preapproved and can transfer your high interest rate balances to a low or zero interest rate. All you have to do is complete the preapproved application and send it back.
But that’s not all you should be aware of. Balance transfers can be a good option to manage your credit card debt, but if you’re not careful, you could end up in worse financial condition than you were before. Here are a few credit card balance transfer traps to avoid:
The first thing you need to know is that balance transfers cost you money. You are paying a percentage of the amount you transfer, or a minimum fee. The minimum fee is typically $5 or $10. Consider this carefully because if you are transferring thousands of dollars, you will end up paying anywhere from five to 10 percent of the balance transfer amount. To transfer a $10,000 balance, for example, a 5-10% fee would add up to $500 to $1,000. This fee adds to the new credit card balance and accrues interest, along with the rest of your balance.
Interest Rate Increases
Another pitfall you want to avoid is the interest rate trap. The way credit card companies tend to lure you into a balance transfer is with a very low or zero percent interest rate. The low interest rate only lasts for a set period, typically six to nine months. If you pay off the balance during this then you are generally saving money over the high interest rate credit you transferred from. The problem comes when you don’t pay off the balance. If you’re not quick to pay off your outstanding debts, your interest rate tends to jump up into the double digits—at times higher than you were paying before the transfer.
Racking Up New Charges
The final pitfall you should avoid is racking up new charges on the card. It is common for balance transfers to have a different interest rate than new purchases. New purchases are often charged at the regular interest rate, which is usually in the double digits. Not only does this increase the interest you are paying, but it cancels out the savings you could enjoy from the balance transfer.
You might open your mailbox today and find a balance transfer deal from an existing or new credit card company. Read the fine print first – make sure you’re aware of any fees or interest rate hikes. Second, create a budget with a solid financial plan for paying off the balance you transfer.
Before you experience any interest rate increases, make additional purchases to add to the balance on the card, or pay any fees to transfer the balance to the new credit card, you need to be aware of your options and make sure that your credit card balance transfer leaves you in better financial condition than you started.