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Brutal Mistakes to Avoid with Balance TransfersJune 23, 2020
A balance transfer deal can help you get rid of debt quickly by allowing you to pay down the principal faster.
Most balance transfer cards offer 0% interest for a limited amount of time - known as the promotional period.
Since no interest is charged during this time, all payments you make on the card go entirely towards reducing the principal amount.
However, using a balance transfer card can have certain negative implications as well.
To gain more and lose less through your balance transfer deal, keep the following in mind.
The amount of fees charged by the card
Many balance transfer cards charge a percentage of the amount transferred as balance transfer fees – this is often as much as 3% of the amount transferred.
For example, if you plan to transfer $1,000, your balance transfer fee would amount to $30.
On top of that, you may have to shell out annual fees as well.
So before embarking on any balance transfer deal, make sure that the fees you pay don’t outweigh your savings on interest.
The promotional window
To get the promotional rate, the balance transfer card may require you to transfer the amount within a certain time frame – say within 60 days of opening your account.
Before signing up for this deal, make sure that you'll be able to move the balance within this time frame, or you may end up paying interest charges on the amount transferred.
The length of the promotional period
If the promotional period is too short – say 6 months – it may not provide you with enough time to pay off the entire transferred balance.
At the end of the promotional period, you would have no option but to pay interest on the remaining balance at normal or higher rates.
Thus, make sure the promotional period is long enough to enable you to pay off the transferred balance entirely.
Effect on credit utilization
Credit utilization ratio is the proportion of used credit to available credit.
Experts suggest that total credit utilization, as well as credit utilization on individual cards, should be kept below 30% at all times.
Transferring a balance from a lower limit card to a higher limit card will likely improve the credit utilization ratio; however, if it is the other way around, your credit utilization ratio, and thereby your credit score, may suffer.
Lowering of credit age
Whenever you apply (and are approved) for a new credit card, the average age of your account falls – as the average age of your account is a factor in credit score calculation, your score can take a hit.
However, if you are transferring a balance from one card to another existing card, then the average age of accounts won’t be affected.
Impact of hard inquiries
Whenever you apply for a new credit card, the potential creditor pulls your credit score in what is known as a hard inquiry.
Each hard inquiry can knock off about 5 points from your credit score; however, these inquiries stop impacting your score after 12 months from the date that they take place.
Finally, getting approved for a balance transfer card increases your overall credit limit.
If you use this opportunity to rack up a larger balance, you are likely to fall deeper into the debt trap.
A balance transfer can prove to be advantageous or disadvantageous depending on how well you research the deal, and how conscientiously you pay off the balance, once transferred.
If done wisely, and in a disciplined manner, it can certainly help you get rid of debt.
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