Many people receive offers from their credit card companies asking them to take advantage of a special APR interest rate when they transfer a balance to this account. This blog with discuss why a balance transfer usually isn't a good financial decision to make.
Balance transfers, most of the time, carry a fee when transferring a balance from one card to another. The fee is usually around 3% and cannot be less than a certain amount and higher than another. This fee could make the card balance a lot higher than if the money was just left on the first card. Sometimes the offer might only be for a limited time: 0% APR for 6 months or 4.6% APR for 12 months are some of the offers I've seen come in the mail. You may plan to pay off this balance in the alloted time, but events come up and you're unable to pay the balance off in time. After the promotional time has expired, the card’s percentage rate will then go up to it's original APR that might even be higher than the first card was anyway.
Another bad point for balance transfers is that many credit card companies pay off lower interest rates first on an account. So lets say you had a balance transfer of 5,000 to another card thats 0% APR for 12 months. A couple weeks later you use the card for other charges using the purchase APR on your card at 16.95%. When you go to make a payment on this card the payment will go towards paying off the 0% APR rather than the 16.95% APR. You will keep getting charged the larger interest rate on new purchases, and will not be able to pay that part off until you pay off the 0% APR balance first.
After giving several reasons for not using a balance transfer, I will tell you the only reason you should use a transfer. This would be if you want to improve your FICO score. Lets say you want to get a new house within the next year and you want to get the best interest rate possible on a new mortgage. Opening a higher credit limit credit card will help improve the status of your FICO score. It will also help you have a total lower revolving balance on the cards you have compared to the limits on all cards, if you transfer the balance to the new higher credit limit card. Many times you can find a new card that won't charge you for the initial balance transfer if it is a new account, and will provide a low interest rate for a said number of months. After opening the new account it is important not to close the old account because that will make your FICO score go down.
Balance transfers, most of the time, carry a fee when transferring a balance from one card to another. The fee is usually around 3% and cannot be less than a certain amount and higher than another. This fee could make the card balance a lot higher than if the money was just left on the first card. Sometimes the offer might only be for a limited time: 0% APR for 6 months or 4.6% APR for 12 months are some of the offers I've seen come in the mail. You may plan to pay off this balance in the alloted time, but events come up and you're unable to pay the balance off in time. After the promotional time has expired, the card’s percentage rate will then go up to it's original APR that might even be higher than the first card was anyway.
Another bad point for balance transfers is that many credit card companies pay off lower interest rates first on an account. So lets say you had a balance transfer of 5,000 to another card thats 0% APR for 12 months. A couple weeks later you use the card for other charges using the purchase APR on your card at 16.95%. When you go to make a payment on this card the payment will go towards paying off the 0% APR rather than the 16.95% APR. You will keep getting charged the larger interest rate on new purchases, and will not be able to pay that part off until you pay off the 0% APR balance first.
After giving several reasons for not using a balance transfer, I will tell you the only reason you should use a transfer. This would be if you want to improve your FICO score. Lets say you want to get a new house within the next year and you want to get the best interest rate possible on a new mortgage. Opening a higher credit limit credit card will help improve the status of your FICO score. It will also help you have a total lower revolving balance on the cards you have compared to the limits on all cards, if you transfer the balance to the new higher credit limit card. Many times you can find a new card that won't charge you for the initial balance transfer if it is a new account, and will provide a low interest rate for a said number of months. After opening the new account it is important not to close the old account because that will make your FICO score go down.
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