When you see five or six credit cards every time you open your wallet, you may consider one of those credit card transfer advertisements you receive on a weekly basis. You know the ads—the ones that offer a zero- or low-interest rate for a period ranging from three months to a year if you transfer your credit card balance to a new card.
It is not unusual for the average American family to carry a credit card balance of $10,000 or more. However, this could affect your credit score, which is determined by your credit card utilization rate. While there is no ideal utilization rate, it is generally recommended that your credit card debt be no more than 25 percent of your total available credit on all of your credit cards combined. This means if you have four credit cards with a combined credit limit of $20,000, your combined debt should not exceed $5,000.
For savvy consumers, taking advantage of a credit card balance transfer may help credit scores, but be sure to first consider the risks and pitfalls. Balance transfers allow consumers to pay down or eliminate debt without paying additional interest for the time period described in the offer. Once approved for a transfer, it takes about six weeks to transfer the old balance to the new card. For the next six months or the length of zero-percent financing, 100 percent of payments will go directly to paying down credit card debt.
The credit card company may choose to pay off the balance from the old card in several ways:
• Send money to the consumer’s bank account so that he or she can pay off the balance
• Wire the money directly to the old credit card to pay off the balance
• Send the consumer a balance transfer check to pay off the old debt
Be sure to read the fine print before accepting any of these offers. Just because the large print promises a zero-percent interest rate, you may not qualify to receive it. Once you receive your new card, you may find a different interest rate.
Also, look for both zero-percent interest for transfer balances and new purchases during the introductory period. The company may not charge interest on the transfer, but that may not equate to zero-percent interest on purchases during that time. The company may also charge a $50 or $75 fee for a balance transfer.
Shop for cards with low-interest rates, cash-back perks and fraud liability in addition to no hidden fees, annual fee or new membership fee. It is also advisable to always pay more than the minimum payment each month to lower your overall credit card debt.
Keep in mind that credit card companies do not make these offers out of the goodness of their hearts. They are businesses and their job is to make money, and they make a fortune from interest rates and fees. These companies are taking the risk that the consumer will either fail to pay the full balance during the introductory period, pay late or miss a payment. At that point, a company can automatically increase the interest from zero percent to 15 percent or even higher.
Once you make the transfer, be sure to put away your old card so you will not be tempted to use it and return to the debt cycle. Remember that balance transfer offers can be a good thing in helping to eliminate debt. Just be sure you know all of the facts first. This information is provided as a public service by the Independent Bankers Association of Texas (IBAT) and the IBAT Education Foundation. This article is not intended as legal advice with the understanding that the association is not engaged in rendering specific legal, accounting or other professional services. Each state has specific laws governing the creation and use of a power of attorney. If specific expert assistance is required, the services of a competent, professional person should be sought.