Balance transfer credit cards that offer lower or zero percent interest rates can be a smart way to reduce monthly payments and consolidate debt. Here are a few questions and answers that can help you determine if it is something you should consider.
Q: What is a balance transfer credit card?
A: With a balance transfer credit card, you transfer the balance from an existing credit card to a new card with better terms and a lower interest rate. Generally, the zero percent or low introductory interest rate will last for a limited time (typically six to 12 months).
Q: What happens when the introductory interest rate expires?
A: Typically, the new card will have two different interest rates: one for the transferred balance and one for any new purchases you make with the card. When the introductory rate expires, the unpaid balance transfer will be subject to a higher interest rate.
Q: How are monthly payments applied?
A: During the introductory period, generally, payments will go toward the transferred balance first, then new purchases. That means if you transfer $2,000 and make a $20 purchase with the new card, your payments will go toward the $2,000 until it is down to zero, while the $20 purchase will accumulate interest.
Q: Are there fees associated with balance transfer credit cards?
A: Some credit card offers will require that you pay a transfer fee, which is typically 3 to 5 percent of the amount you transfer. Some cards might also have a membership or annual fee.
Q: Can I stay with my current credit card company if they offer a balance transfer option?
A: Most credit card companies won’t allow you to transfer your balance to cards they offer with lower interest rates.
Q: What are the benefits of a balance transfer credit card?
A: Balance transfer cards can help with debt management, debt reduction and savings.
- Balance transfers can simplify your finances by letting you consolidate all your credit card debt onto one card if you have multiple balances.
- For people struggling with credit card debt, a balance transfer gives them the chance to pay down their balance without worrying about accumulating interest for a certain period of time.
- A balance transfer can result in significant savings. For example, you transfer a $10,000 balance from a card with a 15 percent interest rate to a card with zero percent interest for the first 12 months, you could save $1,500 that could be applied to paying down the debt.
Q: How does a balance transfer help your credit scores?
A: Because a balance transfer involves opening a new line of credit, it will lead to a hard inquiry, which could cause your scores to decrease initially. Once you transfer the balance, your amount of available credit will increase, which will lower your credit utilization rate and could have a favorable impact on your credit scores. As you pay down the transferred debt, and if you keep your credit card balances low, your scores could get another boost as your credit utilization rate continues to drop.
Q: How does a balance transfer hurt your credit scores?
A: You could hurt your credit scores by continuing to use your old card and not paying off the amount charged monthly. Continued use of the old card could increase your utilization percentage rate and add to your debt.