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Using Balance Transfers to Lower Interest Rates
Balance transfers have long been an option for providing some
relief from high interest rates. Credit card issuers offer
balance transfers to cardholders to increase their balances. If
you know what to look for, you can save hundreds of dollars in
interest.
The Pros
The pros of balance transfers are simple. You can immediately
reduce your monthly finance charges. This saves you money while
allowing you to apply more of that same monthly payment toward
the principal balance. This can help you pay down the balance
faster.
The Cons
Cardholders who need the most relief from high interest rates
rarely are eligible for reasonable balance transfer options.
Instead, the only offers they tend to get have high balance
transfer fees or very short terms on a promotional rate. In
addition, only those with excellent credit scores are eligible
for the better rates. If you have significant balances, your
credit score has likely been negatively affected, which will
hinder your chances for good balance transfer offers.
Another problem is that the rates are not guaranteed. If you
miss a single payment on that or any other credit card that you
hold, you can lose the preferred rate on your transferred
balance. This is known as
universal default, which is spelled
out in a clause within the terms of your credit card agreement.
Your interest rate could rise to the default rate, which can be
as high as your state's limit.
What to Look For:
- Make sure the interest rate is at least 3-5 percentage
points lower than you are incurring.
- Even if your minimum payment requirement drops, you should
increase your payments or at least hold them steady.
- Your good credit rating and ability to pay more than the
minimum payment will provide you with better transfer
offers.
You Should Avoid:
- Teaser rates: Offers lasting less than 8 months
are of little value, unless you can pay the amount off
during that time.
- High balance transfer fees: These can cost you dearly
by immediately increasing your transferred balance by a full
3-4%.
- Frequent balance transfers: Too many transfers
can lower your credit score and ruin future transfer offers.
- Required purchases: Some transfer offers require
a minimum number of purchases to preserve the lower rate.
Any purchases will incur a much higher interest rate.
If you are considering using balance transfers to get lower
rates, make sure you evaluate each offer to ensure that you are
actually improving your chances for eliminating your debt.
Remember that you cannot borrow your way out of debt. Balance
transfers can be effective only if they help you reduce your
debt balances.
Questions about balance transfers can be fielded by our
Accredited Financial Counselors. Feel free to
contact us for more information.
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