If you have a lot of high-interest debt and you’re having difficulty paying it down, you have a few options. First, you can call your lender and try to negotiate a lower interest rate. Second, you could consider moving your high-interest debt to a lower interest rate credit tool like a line of credit. Finally, you could use a balance transfer credit card and take advantage of the ultra-low interest rates offered by these credit cards.
Balance transfer credit cards are credit cards that offer a promotional interest rate for a set period such as six months or one year. These credit cards allow you to transfer your credit card debt from a high-interest credit card (such as 19.99%) to the balance transfer card, which offers a very low promotional interest rate (such as 0%).
A balance transfer credit card can be a great tool because every payment you make reduces the principal debt owed, and none of it goes to interest. A balance transfer credit card can save you hundreds of dollars in interest payments and can help you become debt free sooner.
While using a balance transfer credit card can help you become debt free sooner, there are several pitfalls to this strategy, and if you fall victim to them, you could end up in more debt than when you started. Here are the drawbacks of balance transfer credit cards:
Balance Transfer Fees
Some balance transfer credit cards charge a balance transfer fee. This fee is usually between 1.00 – 5.00% of the balance you transfer. For example, if you transfer $10,000 to a balance transfer credit card at the balance transfer fee is 3.00%, you’ll pay a fee of $300. This fee is usually added to your credit card balance, so it’s important to make a note of this and add that to your calculations.
Your Balance Transfer Credit Card’s Interest Rate Will Increase
If you are considering using a balance transfer credit card, it’s imperative that you only transfer a balance that you are confident you can pay off during the promotional period. You must pay off the entire balance of the credit card because, at the end of the promotional period, the interest rate on a balance transfer credit card will increase to a normal interest rate for a credit card like 19.99%. Whatever balance remains at the end of the promotional period will be subject to these interest rates.
In some cases, if you miss a monthly payment or you have a balance remaining, you may be charged interest on the full original amount. It’s important that you read the cardholder agreement very carefully, so you are aware of the consequences of having a balance left over when the promotional period ends.
Don’t Use Your Balance Transfer Credit Card for Other Purchases
With a balance transfer credit card, the low promotional interest rate only applies to balances that you transfer. Any new purchases will be subject to the credit card’s regular interest, which will be close to 20%. Balance transfer credit cards are best used for balance transfers only.
Are Balance Transfer Credit Cards a Smart Move?
So, if you have a significant amount of high-interest debt, is a balance transfer credit card worth considering? The answer is yes, with one condition. You must make sure you only transfer a balance that you can pay off before the promotional period ends. If you do this and pay off your debt promptly, it can be a great way to decrease the overall amount of interest you pay on your debt. Just be sure to pay off the debt promptly, don’t use the credit card for any other purchases, and factor the balance transfer fees into your calculations.