The Pitfalls of a Balance Transfer

You can slash your monthly debt payments by transferring balances to low interest rate credit cards. It sounds simple enough, and for many people, balance transfers are a smart move. However, in some instances, rolling over your debts can come back to bite you. Aside from hidden fees and unpredictable interest rates, balance transfers can even harm your credit score and increase the cost of future borrowing.

Transfer Fees

Always read the fine print when you complete a balance transfer. The new card company may seduce you with a lower interest rate, but many cards actually charge you a balance transfer fee. This fee normally amounts to a fixed percentage of the balance that you plan to transfer. A 5 percent fee on a $5,000 balance is $250. All of a sudden, your credit card debt just grew and you have not even used your new card yet. Once you factor in the fees, you might not even have enough credit on your new card to transfer the money you currently owe.

Interest Rates

Balance transfer offers usually include two separate interest rates. Bold lettering and colored text are often used to draw your attention to the introductory rate that you will pay on the transferred debt. Introductory periods often last for a year or less; after that period, you must pay the less prominently printed default interest rate. Typically, default rates are much higher than introductory rates. If you cannot pay off the balance owed during the introductory term, you should compare the default rate to the interest you are paying on your current cards.

Credit Score

The average lifespan of your debts accounts for 15 percent of your credit score. If you close an old card and transfer the balance to a new card, you have just slashed your average length of account history. You also lose points if you carry high balances on your credit cards because 30 percent of your overall score depends on your account balances. If you have low balances on several cards and transfer all of that debt onto one card, then you have a high utilization level on the new card. When your credit score drops, borrowing becomes more expensive. This means you may have to pay more if you take out other loans in the future.

Processing Problems

Balance transfer offers usually include stipulations that enable the credit card company to refuse balance transfers if your credit score or income level decline after you accept the card offer. Transfers can also take a while to complete and you could miss a payment date on your current card while you are waiting for the new card issuer to roll over the balance. Late payments cost you money in terms of fees and hurt your credit score. You can contest a late payment with the old card company, but ultimately, you are responsible for making sure that payments are made on time.

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