Balance transfer credit cards are cards that offer a low promotional rate for balances transferred over from another credit card.
For example, a balance transfer card might offer you a 0% interest rate for 15-months on up to $5,000 in transferred balances. If you moved money from one or more old credit cards over to the balance transfer card, you would be able to pay 0% interest for over a year on up to $5,000 worth of credit card debt.
Because balance transfer cards eliminate interest cost for a period of time, they can make it easier to pay what you owe. That’s because your entire monthly payment will be going to pay down the balance, rather than to cover the interest that your creditors are charging you.
But while the ability to drop your interest rate dramatically makes balance transfer credit cards really attractive, consumers need to be aware that it’s only temporary.
The downside of balance transfer credit cards
Many people assume that the catch with balance transfer cards is that most of them charge a fee for the transferred funds. For example, you might be charged 3% of the transferred amount in order to complete a balance transfer and move credit card debt from one card to another.
But this balance transfer fee is typically disclosed up front, and may be worth paying. After all, if you pay a one-time 3% fee but you don’t owe any other interest over the course of the whole year, then you’re essentially paying about the equivalent of 3% interest annually — which is much lower than the annual percentage rate (APR) on most credit cards. It’s not really a catch, because the fee is often well worth it.
Instead, the big downside of balance transfer cards is the fact that the 0% introductory rate is available for only a limited time. And the minimum payments that you’ll have to make on your new credit card after transferring a balance generally are not high enough to enable you to pay back the full transferred amount before the promotional rate expires.
The problem is, the standard interest rate on a balance transfer credit card can be very high. And any balance on your transferred credit card debt that remains at the end of your promotional period will be subject to this higher rate.
If you pay only the minimum after transferring a balance, then chances are good you’ll still owe a whole lot of money when your 0% initial interest rate expires. When your rate jumps up, you could end up paying a fortune in credit card interest. In fact, your rate may be higher than it was on the card you transferred the balance from, so your debt could end up being a lot more expensive than if you’d just left it alone.
To avoid this fate, it’s crucial to figure out how much you need to pay each month to get your transferred balance down to $0 before the promotional rate expires. That’s because you can and should pay more than the minimum payment due.
If you can’t pay enough each month to pay down your balance in full before the 0% rate ends, and the interest rate is higher on the balance transfer card than you’re currently paying on your existing debt, then a balance transfer may not be the best option for you.
View more information: https://www.fool.com/the-ascent/credit-cards/articles/whats-the-catch-with-balance-transfer-cards/