When to use & how to choose a balance transfer credit card: the new basics
Some people get very moralistic about debt, and look down their noses at those who have any at all. But there's nothing wrong with a little credit card debt. In fact, there are times when it's a positively good thing. Suppose you've recently been unemployed and have eaten up (literally as well as figuratively) your cash reserves. Just as you're due to start a new job, the car you're relying on to get you to work breaks down. Is it better to call your employer to say you won't be able to take the offered post, or to charge the repair to your plastic?
There are limitless similar examples of when the smart choice for those who lack alternatives is to run up debt. And that's not counting those for whom there's no choice: when it's a question of feeding the kids or filling a vital prescription. No, the problem often isn't moral; it's practical.
Credit card debt problems
The trouble with running up too much of this sort of debt is that those pesky credit card companies tend to insist you pay them back. And they demand high levels of interest too. At the time of writing, IndexCreditCards.com reports that average credit card rates are 15.09 percent annual percentage rate (APR) for consumer non-rewards cards, and a full 17.48 percent for consumer rewards cards. And those are averages: for every cardholder with a brilliant credit score paying less than 10 percent, there are likely to be quite a few paying well over 20 percent.
It's when people find themselves facing this toxic blend of credit card debt and high interest rates that problems often begin. And it's then that many turn to balance transfer credit cards. These can provide a breather from the burden of interest payments by offering in most cases zero percent APR for a typical period of six to eighteen months. As the name implies, you simply transfer the balances from your existing credit cards to a new card.
Good credit history a must
Browsing the comprehensive list of balance transfer credit cards on IndexCreditCards.com, there's currently not a single one that's available to those with less than "excellent" credit. Now, that probably doesn't mean that your credit score has to be spot-free, but it does suggest that, in order to be approved, your credit report should be generally favorable.
So timing is all. If you wait until you fall behind on your payments, you may well be too late. Make your credit card application as soon as you anticipate possible problems, and it's much more likely to be successful.
Balance transfer credit cards can help--if you let them
Last September, IndexCreditCards.com released an article (Transfer Balance, Then Put That Card Down!) that explained a real danger that frequently arises with balance transfer credit cards: people see them as a new line of credit that's there to be used. If you're smart, you won't do that.
Credit card companies often include in their terms and conditions a clause that means that all your monthly payments are going to be applied first to the balance transfer amount. So if you charge new spending to that card, you're not going even to begin paying it down until you've cleared the balance transfer. Instead, it's going to sit there accumulating high interest rates.
So, if at all possible, the best thing to do when you have a balance transfer card is to put it away somewhere safe until you've paid it down completely. By all means, continue to use your other--now debt free--credit cards (that way you can continue to earn rewards and enjoy the consumer protections they offer), but only charge items that you know you're going to be able to clear at the end of the current billing cycle. That way, when the balance transfer card's paid off, you should have absolutely no credit card debt.
Choosing balance transfer credit cards
There are two important things to look for when you're selecting a balance transfer credit card:
- The length that the 0-percent APR will apply--generally between six and eighteen months. Pick one that will allow you to zero out the balance comfortably before a higher rate kicks in.
- The amount of the balance transfer fee. That's the percentage which is usually between 3 - 5 percent of the amount transferred that the issuer adds to your opening balance. Watch out for occasional promotions that waive this fee, but expect to have to pay it.
Of course, you may plan to close the new account at the end of the zero-APR introductory period. But, if you don't, you should also add into your selection criteria the card's suitability for your needs when it's used normally. Is its rewards program generous and appropriate for your lifestyle? Is its standard APR reasonable? Does it charge an annual fee? That sort of thing.
You can click through the links on this page for more information or to access a credit card application. Good luck!
Published 07/27/11 (Modified 07/09/14)