Most people would have encountered very lucrative balance transfer offers (e.g. 0% balance transfers etc.) from various credit card providers. And such offers often leave you wondering whether it would be a good idea to go grab one of these offers or not. So, let’s have a quick look at aspects surrounding credit card balance transfer…
What is credit card balance transfer?
Simply put, credit card balance transfer is the process of transferring the balance from one or more credit cards to another credit card. Now, this ‘another credit card’ could be a credit card that you already hold or it could be a new credit card.
What sort of terms and conditions apply to credit card balance transfers?
It is very important to understand that most (almost all) credit card balance transfers will have several terms and conditions that influence your interest rates and interest calculations. Here are a few things that you should surely be aware of:
There are various interest rates that might be associated with your balance transfer deal e.g. you will have an introductory rate, a rate that would be applicable post the introductory rate period, a rate that will be applicable on new/old balances etc.
Introductory rate: The ‘0% APR’ that you see in most credit card balance transfer offers is the initial interest rate that is charged on your balance and it is applicable for only an initial period i.e. few months (e.g. 12 months).
Regular rate: This is the rate that kicks in after the period of introductory rates is over. This regular rate is mostly higher than even the rates that you would get on a new card without balance transfer. You should also check the terms and conditions that influence the early kick-in of high interest rates (e.g. a missed payment might make it start early).
It is also important to understand that the actual rates that are offered to you would mostly be dependent on your credit score.
It is important to note that most balance transfers come with a fee (e.g. 3% of your balance). So, this is something that you need to check as well.
When should you go for a credit card balance transfer?
Credit card balance transfers make most sense when you are confident of paying off your entire balance (transferred balance and the new balance) within the introductory period e.g. you might be expecting a windfall gain like a bonus or you might have a temporary financial crisis that prevents you from paying back your debts. So, in that sense, it is a means to managing your debt situation or financial crisis too.
Also, you would need to do the calculation (there are online calculators available to help you) to see whether the interest amount you save is actually more than the fee etc. that you pay for balance transfer.
The credit score angle to balance transfer
Balance transfer might be a good idea for the reasons and situations mentioned above but balance transfer can impact your credit score negatively.
A balance transfer (just like any credit application) would involve a credit inquiry which causes a slight negative impact on your credit score.
Also, if you are moving your balance to a credit card with a lower credit limit than your current credit card then again your credit score would be negatively impacted – because the credit limit utilization is inversely linked to your credit score.
Finally, if you are transferring the balance to a new credit card, you will lose out on the average credit age calculation (i.e. the average time since when you have been using credit) which will have a slight negative impact on your credit score.
Evaluate your situation and objective for balance transfer; calculate your savings and consider the impact on credit score (especially if you are planning to apply for a loan e.g. mortgage loan in near future) before going for credit card balance transfer. You might also want to try your hand at negotiating better terms on your current credit card.