Hidden Costs of Credit Card Balance Transfers

Written by: Christy Rakoczy

Credit card balance transfers can be a good way to help you to pay off higher interest debt faster.  However, balance transfers have some potential drawbacks to consider.  Before you use balance transfer checks that come in the mail from your existing credit card company or before you open a new balance transfer credit card, you need to consider carefully the pros and cons and make sure you understand what you are getting into.

How Do Credit Card Balance Transfers Work?

A credit card balance transfer is an offer from a credit card company to move the balance of other loans onto that credit card.  Typically, you must provide the account numbers of the credit cards or loans that have the balances you will be transferring. The new balance transfer card company then pays your old credit card company directly and you will owe the new company the money they paid.

In other instances, the credit card balance transfer will simply be available via a check that you are sent.  You can deposit the money into your bank account and use it to pay off credit card debt or anything else, although you may be restricted from using the balance transfer to pay off a credit card from the same company that provided you with the transfer.

Regardless of whether you receive a check or the new balance transfer company makes the payment directly, your old debt will be paid off and you will no longer owe it to the original creditor. You will instead have a new debt that you must pay to the new creditor according to the terms of your credit agreement.

Interest Rate and Fees

The reason that many people choose to take a balance transfer is that creditors often offer low promotional interest rates to entice customers to do so.  It is very common for a credit card company to offer a 0 percent interest rate on money transferred to the account using a balance transfer. This rate is offered to try to convince you to move your debt over and thus become a customer and cardholder of the new company.

However, this low interest rate is typically a promotional rate only and will last only for a limited period of time.  You may receive 0 percent financing on balances transferred for the first six months or for the first year.  After your promotional interest period ends, the credit card company will then raise your interest rate, usually to a very high amount.  Before you take a balance transfer, therefore, you need to make sure you can pay off the entire transferred balance before the promotional rate expires.

You also need to be aware that there is a cost associated with a balance transfer even though there is either no interest or minimal interest.  This cost is a balance transfer fee, which might be equal to as much as 3 to 5 percent of the total balance transferred.

Is a Balance Transfer Right For You?

Despite the fees, a balance transfer may be the best option in many different circumstances.  For instance, if you have a high balance on your cards, it might be advantageous to take a balance transfer and simply pay the 3-5 percent in fees.  If your promotional rate is good for one year and you will be able to pay the loan off in one year, this effectively would mean your annual “interest” was equal to the 3-5 percent fee… significantly less than the high rate on your old card.

Before you take a balance transfer, just be sure to do the calculations and to make sure both that you can pay off the transferred cash and that the loan will pay off in the long run.


Hidden Costs of Credit Card Balance Transfers

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