3 things to Watch for with Balance Transfers
<p data-sp-element=”content”>For many people who are struggling with high interest rates on their credit cards or personal loans, a balance transfer can seem like a good idea. This method of saving method requires you to find a credit card with a lower interest rate, then move your debt from the low interest card to the high interest one. Using this method to save money, however, comes with a few things that you should be aware of.
- You need good credit. Qualifying for a better credit card than the one you currently have is often the hardest part of using this method. For the most part, credit card companies will assign you the same small range of interest rates based on your credit score; there isn’t a lot of variation from one company to the next unless you have improved your score recently. Your score will update on a monthly basis, and it takes about six months before a mistake will start to disappear from your credit rating, however, so you may want to keep checking around.
- You will be charged a balance transfer fee. These fees can range anywhere from 0 to 5 percent of the total amount that you transfer to the new card. If you’re not saving that much or more in interest, then you’re actually losing money by doing a balance transfer.
- Your credit score might go down slightly. Opening up another credit card and temporarily showing a balance on both cards will lower your credit score by a few points. While this will go away after a few months, if you’re on the edge of qualifying for a mortgage or car loan, you might want to wait.
If you need to get a lower interest rate on your credit cards, but you just can’t seem to qualify for a low enough rate to make a balance transfer work for you, then you might want to consider a debt consolidation loan instead. These loans can offer you slower interest rate than many credit cards because you work with a debt counselor to assess your budget before applying for a loan. Banks see these loans as lower risk than credit cards, allowing them to offer lower interest rates and better payment terms.