Credit cards can be powerful tools that help if you don’t have cash on hand for an emergency, or even to cover everyday expenses between pay periods. They work much like any other loan in that you can buy something today and then pay off the balance later.
But credit cards can also get us into trouble. Maybe you have a high balance and are making minimum payments that don’t seem to be making a dent. Or maybe you’ve missed a payment or two, which led your card provider to increase your interest rate.
If you’ve been in this situation, you may have considered a credit card balance transfer. Card providers sometimes attract new customers by offering them a low-interest or even zero-interest card for a limited period of time. In combination with a low rate, they may also advertise a balance transfer. This means that you could potentially transfer a high-interest balance to another lower-interest credit card.
On the surface, this may sound great — but it’s a big decision. Before you jump, it’s important to ask a few questions.
1) Will this be a hard inquiry?
a) New credit card: Yes. If you’re considering opening a new card for a balance transfer offer, there will be a hard inquiry, or pull, on your credit file. Even if you’re pre-approved, applying for a new card will appear on your credit report. A hard inquiry could affect your credit score, particularly if you’ve had other recent inquiries. And even if you’re not approved, it could appear in your history. That’s why it’s important to be certain that the card is right for you before you apply.
b) Existing credit card: No. If you are not applying for a new card, there will not be a hard credit inquiry. For example, if you’re transferring a balance from a higher-interest credit card to a lower-interest card (that you already have), you will not have a hard pull. However, there are still some risks when it comes to your credit score. Think twice about closing a zero balance card, as this may affect the average age of your accounts. Generally, the longer you have a credit line, the better, because creditors like to see a longer history of payments.
2) How long will your interest rate stay in effect?
The card provider is required to let you know how long the introductory rate will last — it should stay in effect for at least six months. If the duration is unclear, make sure to fully read the terms and ask questions. If you make a late payment, your provider could increase your rate. Also keep in mind that if you transfer your balance to a lower-rate card, you should still pay as much as you can. If you are paying back your previous monthly payment (let’s say $50) at a lower rate, this should help you in the long run. If, once you get the lower rate, you decrease how much you’re paying every month (to, for example, $30), it will take longer to pay down your balance. And the longer that takes, the more interest you may face.
3) Is the rate variable?
If it’s low-interest (and not zero-interest), it may have a variable rate. A variable rate could change within the first six months, based on an index that helps determine the rate. If the index is based the prime rate, for example, and the prime rate changes, your rate could also change.
4) Will they charge a balance transfer fee?
Your provider may charge a fee, even if you get an introductory zero-interest rate. This is normally a percentage of the amount you’re transferring from one card to the other, and you must be told upfront about it. Be sure to read the terms carefully to understand any possible fees.
5) Will you make additional purchases?
If you think you’ll need to use that card for purchases beyond the balance transfer, consider that you may be charged additional interest on the newer charges.
And instead making a balance transfer right away, you might consider asking your credit card provider about a debt repayment plan for customers experiencing hardship. If you’re able to make payments, ask if they’d consider reducing your interest rate or even about the possibility of waiving late fees or over-the-limit fees.
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Disclaimer: LendUp is not providing financial, legal or tax advice. If you need or want such advice, please consult a qualified advisor.