The Ins and Outs of Balance Transfers

Paying hefty interest on a credit card or car loan? With the average credit card interest rate around 15 percent, some creditworthy consumers choose to transfer high interest debt to a new credit card offering a zero interest introductory rate and avoid paying interest.

“Transferring a balance is essentially an opportunity for you to get out of the debt,” says John Ulzheimer, Credit Expert for Credit Sesame. However, too many balance transfers could make it look like you’re just playing the “zero percent interest game” instead of paying your bills, so those zero percent interest offers may eventually dry up or other credit issuers could lower your credit limit if you aren’t careful.

Here’s what you need to consider before completing a balance transfer.

How long does the low interest rate last?

Introductory interest rates may last 3 to 18 months, but it’s usually a finite period of time. Once that introductory rate disappears, the interest rate will often skyrocket, so it’s best to pay it off during that initial promotional period. “Most of the disclosures don’t tell you what the rate is going to be because they don’t know what your credit risk is going to be,” says Ulzheimer.

Can I pay it off during the promotional period?

Don’t count on being able to repeatedly roll over debt to another zero interest offer, because credit card issuers may see your activity and catch on. Plus, over-utilizing credit could lower your credit score, making you less likely to qualify for another zero interest offer. “It’s like a Ponzi scheme that only works as long as these offers keep rolling in,” says Ulzheimer. If you miss a payment, he warns, “you may end up paying interest retroactive to day one.” Missing payments makes you a higher-risk borrower, so it’s perfectly legal for credit card issuers to do this.

Is there a balance transfer fee?

Some credit cards charge a balance transfer fee of one to three percent, so do the math and make sure you’re saving enough in interest to make a balance transfer worth your while. If you shop around, you might also be able to find a card that doesn’t charge a balance transfer, says Ulzheimer. Still, read the fine print and watch out for other potential fees.

Will zero interest apply to new purchases?

Depending on the details of the card, new purchases might be charged much higher interest. If that’s the case, then only use your balance transfer card for paying off an old debt and keep new purchases separate to avoid paying interest rates and defeating the purpose of a balance transfer.

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