Lots of people get balance transfer offers in the mail. If you're in the process of paying down your debt, the low or no interest rates can be very attractive. However, all balance transfers are not created equally. You need to evaluate your options before you take the leap and make a balance transfer. Here's what to look for.
Consider More Than Just the Interest Rate
Mike Sullivan, director of education with Take Charge America, says that it's important to consider more than just the APR when looking at a balance transfer card. "A lot of times people just look at the balance transfer terms and that's a mistake," Sullivan says.
He says that people need to look at fees, as well as the APR after the introductory rate runs out. Annual fees might erode a lot of the value of the card, and the initial rate offered in your letter might not be what you actually get.
"If they say you're pre-qualified for $10,000, you're probably not actually going to get $10,000," says Sullivan. You'll get your rate when you actually get your card in the mail. That's important, because you might not be qualified for enough to transfer everything you need onto the new card. What's more, even if you can transfer everything that you need, it might make your credit utilization so high that you'll negatively impact your credit score. Once you start paying down your debts, your utilization might go down, but you need to be ready to take an initial hit.
Know the Terms of the Transfer...
Kevin Gallegos, the vice president of Phoenix Operations for Freedom Financial Network, agrees with Sullivan about reading the fine print carefully. "You need to track the terms of the agreement," Gallegos says. "If you're good at managing bills, you might be able to pay off your balances faster. The full payment is going to go toward the principal."
The problem comes in when you see the limit on the introductory APR. "Most zero interest offers are only for half a year or a year," he says. If you don't pay off the card in that time, your interest is going to increase. That's going to defeat the purpose of getting a zero-interest card.
Additionally, Gallegos cautions people to look at the balance transfer fee in addition to the annual fee.
"This is usually 3% of the balance you transfer," he says.
On a $10,000 balance transfer, that's going to be $300. You need to look at how much you're going to save in interest payments to see if it's worth it to transfer the balance. "Consider the interest rate you pay now, your potential savings and if you're going to be able to pay off the bill before the introductory rate expires," Gallegos adds.
Know the Impact On Your Credit...
You also need to know how the balance transfer will impact your credit.
"Doing one balance transfer and paying the debt off quickly can be worth it," says Gallegos. "But you shouldn't keep moving balances from card to card." This is a sign to potential creditors that you have problems. And, as always, there's the need to keep your credit utilization as low as possible, both on all your cards and on each individual card.
What's more, every time you get a new card, you're reducing the average age of your credit. That's not the most important factor in your credit report, but it's one of the factors. That's something that you need to consider before you get a new credit card.
Of course, you can also use a credit balance transfer to improve your credit score. Sullivan points out that a balance transfer can actually improve your credit utilization score. "If you're using a $10,000 card and your utilization is really high, it might make sense to open a new account so that you can lower your utilization rate," Sullivan says. He notes that "if that's one of your reasons, the same guidelines apply -- you still have to think about how much it's going to cost and if it's worthwhile." He also cautions people to stop using the card they transfer their balance from.