When you’re overwhelmed by credit card debt, a balance transfer can seem like a tempting solution.
The idea of consolidating your debt to a single account, potentially with a lower interest rate, sounds promising.
1. High Balance Transfer Fees
One of the most common risks of balance transfers is the fee associated with them. Many credit cards charge a balance transfer fee, which typically ranges from 3% to 5% of the transferred amount.
While it may seem small, when you transfer a large balance, the fees can quickly add up, potentially negating the benefits of the transfer itself.
Be sure to calculate how much the fee will cost and factor that into your decision. In some cases, the interest savings might not outweigh the fees.
2. Teaser Rates Expiring
Another risk of making a balance transfer is that the low or 0% interest rate you’re offered may be temporary.
Most promotional balance transfer offers come with a limited time period during which the low rate applies. After this period ends, your interest rate may spike, sometimes even higher than the rate you were originally paying on your old card.
It’s important to be aware of when the introductory rate expires, and ensure that you can pay off the balance before the rate increases. If not, you may find yourself paying even higher interest rates than before.
3. Increased Debt if You Accumulate More Charges
It can be easy to view a balance transfer as a “fresh start,” but one risk that many people overlook is the temptation to add new charges to the credit card after the transfer.
This is particularly dangerous if you’re transferring a large amount of debt and then continue to charge purchases on the card.
When this happens, you can quickly accumulate more debt, putting you back in the same situation you were in before the transfer. To make the most of a balance transfer, it’s critical to stop using the card for new purchases while paying off the transferred balance.
4. Impact on Credit Score
Balance transfers can also have an impact on your credit score, especially if you don’t manage the new balance properly.
Although transferring debt from one credit card to another can help you reduce your credit utilization rate (which can be beneficial to your credit score), it can also hurt your score if you don’t make timely payments or if the transfer causes your credit utilization rate to spike.
In addition, if the card issuer reports your account as carrying a high balance compared to your credit limit, your credit score could be negatively affected. This is especially important to watch if you have a large balance relative to the new credit card’s limit.
5. Not Paying the Balance in Full
Even with a low interest rate, balance transfers are still a form of debt. If you don’t pay off the balance within the promotional period, you could be left paying high interest rates once the introductory period ends.
The longer it takes you to pay off the balance, the more interest you’ll end up paying in the long run, diminishing the benefits of the transfer.
Before initiating a balance transfer, ensure that you have a realistic plan for paying off the balance during the promotional period. Otherwise, you might not experience the financial relief you expected.
6. Limited Credit Limits
While transferring balances can be a way to consolidate your debt, there’s no guarantee that your new credit card will have a high enough limit to cover the entire balance you’re trying to transfer. If the new credit card’s limit isn’t high enough, you may still need to carry a portion of the debt on your old card, or find another solution to cover the remaining balance.
It’s essential to know the credit limit on the new card before proceeding with the transfer, as it may not always be sufficient to fully consolidate your debt.