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Balance transfer credit card offers can be tempting. No interest for a year, for 15 months or for even longer? Where do we sign up?
But there are caveats. For one thing, even the best balance transfer credit cards usually charge a fee of 3-4%, so you have to do the math to make sure it’s worth it to move your balance. Plus, people with poor credit won’t have the option, because these offers target people with great credit scores.
Choosing to transfer a balance
Let’s say you’ve used the Nerds’ balance transfer tool and found a great 0% APR credit card offer; the transfer fees are less than what you’d pay in interest during the introductory 0% interest period; and you’ve moved your balances from other cards. What do you do now?
Many consumers wonder if they need to use the card once they’ve got it. The answer is no. That’s because the 0% APR usually only applies to balance transfers, not to new purchases. Depending on how your payments are allocated by the card issuer, you might have a hard time paying down the new purchases you’ve made — which are accruing interest.
The Credit Card Act of 2009 requires card issuers to apply any amount over your minimum payment to the portion of your balance with the highest interest rate, but the minimum payment itself can be allocated however the card issuer wants. That means your minimum payment may go toward reducing the interest-free portion of your debt, not new purchases that may carry a high rate. Read the fine print on the credit card offer and see how new purchases are handled — what the interest rates are and whether new payments attack the interest-bearing portion of your balance first.
What about my old plastic?
In most circumstances, you should keep your old credit cards open, because account longevity is an important factor in calculating your credit score.
So why not use your old card, now with no balance, to make new purchases? You can, but be careful to pay it off in full every month so you don’t continue to rack up high-interest debt. At the same time, keep your spending down so your credit utilization ratio — the percentage of overall available credit that you’re using at a given time — remains low as well. These strategies are important for the care and feeding of your credit score.
Revisit your spending habits
This is also a good time to take a hard look at how you got into debt in the first place. If you find it tough to keep your spending in check when you’re using plastic, you’re not the only one. Studies show that people using credit cards spend more than people paying with other methods. If that’s true for you, it might be better to stop using your credit cards for new purchases.
Instead, focus on paying down your debt before the interest holiday on your balance transfer card expires. Here’s hoping this is the year you say goodbye to credit card debt forever.