Trying to manage your credit card debt before it manages you? If so, you might be considering a balance transfer to a card offering a 0% promotion. In some cases, this is a smart choice, but be sure to do a little analysis before you pull the trigger. Surprisingly, it’s not always the best way to deal with your debt.
Here are five times a balance transfer might be a bad idea:
1. You can pay off your balance in six months or less
One thing that many people forget about transferring a balance is that there’s almost always a balance transfer fee involved. In most cases, a balance transfer fee will amount to 3% of the debt you’re moving onto the 0% card – this might not sound like much, but it could add up to hefty chunk of change if you’re running a high balance.
As a rule of thumb, if you think you can pay off your balance in six months or less, you should steer clear of a balance transfer; what you’ll pay in fees will likely outweigh the savings you’ll see in interest. One notable exception: If you can qualify for the card that waives its balance transfer fee, this is the lowest-cost option.
2. You struggle to make payments on time
Balance transfers are a good opportunity to save on interest, but one wrong move could cause you to lose your chance for good. Issuers are notoriously strict with customers on interest rate promotions when it comes to paying on time – make a late payment and your deal likely will be canceled. If this happens, you’ll start racking up interest on your balance right away.
If you have a history of making late payments on your credit card, you might want to think twice about a balance transfer. It could end up getting pretty expensive if you’re not careful.
3. You don’t have excellent credit
Simply put, you probably won’t qualify for a balance transfer deal if your FICO credit score falls below 720. Most issuers consider scores above this threshold “excellent” and won’t extend balance transfer offers to folks who fall below it.
4. You’re not a disciplined spender
In a typical balance transfer scenario, you’d move your high-interest debt onto a 0% card, then hold onto the original card to keep the credit line available. But the problem with this is … the credit line is available. If you’re not a disciplined spender, you might be tempted to go and charge up the first card all over again. This will leave you in a worse position debt-wise than the one you started in.
If you can’t trust yourself with that much spending power in your pocket, a balance transfer might not be for you.
5. You can qualify for a low-interest personal loan
Transferring your balance to a 0% credit card isn’t the only way to refinance high-interest debt. For a lot of folks, using a low-interest personal loan accomplishes the same goal with a few added benefits. If you can qualify for one (again, you’ll need good credit), this might be the way to go.
In addition to lowering your interest rate, opting for a personal loan instead of a balance transfer could help your credit score. By transforming revolving debt into installment debt, you’re significantly bringing down your credit utilization ratio. This will help the 30% of your credit score that’s determined by amounts owed.
Plus, although you’ll be paying some interest on the personal loan, you’ll have a longer period of time at a reduced rate to pay off your debt. Most balance transfer cards only give you six to 12 months at 0% before they start charging their regular (and usually high) APR. With a personal loan, you’ll likely have three to five years to make your payments. Depending on how long it will take you to pay off your debt, this might actually turn out being cheaper in the end.
Balance image via Shutterstock