Credit card companies often tout the ability to move debt back and forth between cards as a way to easily pay off larger balances in a shorter period of time. While this sounds like a great approach, it is not always the best one. Much like every other thing in the credit card industry, there is fine-print to read and other things to consider before making such a commitment. Here are some major points of advice and information on how balance transfers work and whether or not they will work for you.
The Basics of Balance Transfers
So the story goes like this: Card A (the one you are currently paying on) has an interest rate of 19% with a $2,000 balance. Along comes Card B, offering to give you a 10% interest rate for all balance transfers. In its totality, this is a great deal. In many instances, debt can easily be moved to another credit card (after paying a nominal sum of 1-5% of the balance) and paid off under lower interest rates, which will either save you money each month or can allow you to pay off your balances faster (if you continue to pay the same amount each month).
When Balance Transfers Are Not a Good Idea
Sometimes under the surface, balance transfers can end up being sneak attacks that get you locked into paying more interest than you might have been paying before, depending on your situation and the card’s offerings. For example, if you have an interest rate of 19% and another card offers you a 15% interest rate, it may not be worth it to move that debt and pay the transactional fee; the smaller the balance, the more likely this case applies. There’s also the gotcha mechanism where credit card companies will give you an introductory teaser rate by which you have to pay off the balance before a certain date in order to avoid an increased interest rate. Always be aware of these companies’ tactics and fine-print disclaimers.
When to Jump On a Balance Transfer
The best rule of thumb to follow is you need at least 1% point difference in interest for every $1,000 of credit card debt that you currently hold. This means that having $3,000 in debt @ 18% interest would not be worth the hassle to switch to a card with 16% interest, whereas having $10,000 of debt @ 18% would be worth the hassle to move to the card offering 16%.