5 Questions to Ask Yourself Before Initiating a 0% APR Balance Transfer
January 11, 2018
Adrienne H., Financial Expert
Are you feeling the burden of holiday debt after purchasing all of those gifts for family and friends? If so, you’re not alone. The average American consumer racked up more than $1,000 in debt this past holiday season! Now that the holiday shopping season is over, it is prime time to consider 0% APR balance transfer specials for those credit cards carrying high balances. Balance transfers can be a great idea to avoid paying interest for several months or not at all. However, it’s important to be mindful of how these specials work so you don’t end up digging yourself a deeper hole.
If you aren’t sure what a balance transfer is, here is a quick rundown: a balance transfer allows you to transfer your debt from one credit card to another, typically for a lower interest rate. Balance transfers are a great option to save money by avoiding high interest, and many companies offer low or no interest rates for a fixed period –– often six months to a year. There’s a catch, though. The total balance must be completely paid off within the time period or you will end up paying interest for the remaining balance, which can be at a much higher interest rate.
If you’re thinking about opening a 0% introductory APR credit card, ask yourself these five questions first.
How can a 0% introductory APR balance transfer save me money?
The keyword here is introductory. A 0% introductory APR allows you to payoff your debt without having to pay interest for a certain amount of time, potentially saving you thousands of dollars. For example, if you have a $1,000 balance on a credit card with a 17% interest rate, you would have to make a $195 payment for six months to pay off that credit card. If you transferred that $1,000 balance to a credit card with a 0% introductory rate for the first six months, your monthly payments would decrease to about $166, saving you $170 in interest over a six-month period.
Will I repay the full balance before the introductory rate expires?
If the answer above makes you want to pursue the 0% balance transfer process, it’s important to understand the responsibilities if you don’t repay the full balance before the fixed period ends. Let’s say you only pay back $700 of the $1,000 balance within six months. After those six months, the balance transfer rate will revert to the standard rate you qualified for. These rates tend to be between 15% and 30% for store credit cards (credit union-issued credit cards typically have lower standard rates). For example, if your standard rate is 25%, you’ll have to have to pay $75 in one month’s interest for your remaining balance of $300. You’ll want to make sure you can repay the entire balance before your introductory rate expires or you may end up paying more than the loan balance you originally tried to avoid.
Do I have enough self-control to not accrue additional debt?
Keep in mind that you will most likely continue to spend money throughout the introductory rate period. Balance transfer rates often only apply to the balance transferred from another financial institution and does not apply to new purchases and cash advances made on the card. To make a 0% APR balance transfer worth it, you’ll have to work on paying off the transferred balance and try not to put any additional purchases on that card if you’re aiming to be debt free.
Is there an annual or balance transfer fee associated with the credit card?
At MSUFCU, we don’t charge annual fees or fees to move your balances to a 0% introductory APR credit card, but that isn’t always the case at other financial institutions. Most often, creditors charge a balance transfer fee, which is usually 3%-5% of the balance (about $30-$50 fee when transferring a $1,000 balance). Companies will also try to attract new customers with a 0% APR promotion with no annual fees for the first year. However, after the first year, customers will have to pay a fee (ranging between $25 and $500) each year for use of that credit card.
Do I have good or excellent credit established?
Most lenders will only approve balance transfers for those who have good or excellent credit —a score of 670 or above. However, everyone has a different financial situation and there are many factors each financial institution looks at to determine if you’re eligible for a credit card that offers balance transfers. If your creditworthiness qualifies you for a balance transfer, it’s also important to understand how opening a new card will affect your score. Each time you apply for a new loan, a credit check is necessary. One credit check doesn’t usually have a big impact on your credit score and may help you in the long run, but applying for many in a short time period may negatively affect your credit, making you appear risky to lenders. Remember that full and on-time payments are crucial factors for maintaining good credit.
So, do you think a balance transfer is right for you? Contact us or your financial institution to figure out how a balance transfer can save you money.