Balance transfer credit cards encourage you to save money by transferring the balance of your existing credit card to the balance transfer card. The rate is usually low and is sometimes as low as 0% for a year or more. Is this a good idea? Here’s what you need to know about balance transfer credit cards.
Saving Money on Interest
If you’re carrying a balance on one or more credit cards, transferring the balance to a new card with a low introductory rate can save quite a bit of money on interest, and it can shorten the length of time it takes to pay back the balance. If the promotional rate is 0% for a year, that means for the next year, everything you pay toward the balance goes toward reducing the total amount owed. Your goal should be to pay the balance in full by the end of the introductory rate period.
Most balance transfer cards charge a fee on the transferred balance, which is usually 3 to 5 percent. That means the balance transfer isn’t free, but it’s still likely to cost you less in the long run if you can pay back the balance within the introductory period. However, pay attention to what the interest rate will be when the introductory period is over.
Improved Credit Utilization Rate
A big factor in your credit score is your credit utilization rate, which is the percentage of available credit you’re using on revolving accounts. Opening a new credit card account increases your total available credit, which can improve your credit utilization rate. Paying down what you owe more quickly can also improve your credit utilization rate. Don’t be in a hurry to close your old credit card accounts, since that would increase your credit utilization rate and reduce the average age of your accounts.
If you can transfer the balance on more than one credit card account to the new card, that can be beneficial since you’ll only need to remember to make one payment rather than payments on multiple accounts. If you have more debt than the total available credit on the new card, you can transfer part of your balance.
Don’t use the new card to make purchases, because interest may be charged on purchases even though the interest rate on balance transfers may be 0%. Once you transfer all or part of your balance to a new card, you have more available credit. Avoid the temptation to use the available credit, which would increase your total overall debt.
A balance transfer credit card makes sense if you’re careful not to overspend and always pay your bills on time. Make sure what’s showing on your credit report is accurate. For example, if you’ve paid all or part of a balance on an old credit card but it’s showing on your credit report as still outstanding, that makes your credit utilization rate higher.
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