Balance Transfers Done Right

Got debt? If you answered “yes” you are not alone. Americans carry an average of $90,460 in personal debt. When you consider that this includes housing debt (mortgage and rent), student loans, and revolving debt, it’s not as scary as it seemed, right? Here’s the scoop on debt. As far as I know, no one actually likes it, but when controlled, it’s really not a bad thing. Debt is what helps you build credit. You might remember that credit can help you save money on many different things – car insurance, rent, utilities, and more! Just because there are benefits to smart credit usage, that doesn’t mean you should max out your credit cards.

As you start building credit, you will notice that many creditors will charge higher interest rates. This is a direct response to the assumed risk that the lender takes on. As your credit history develops and you establish a pattern of paying back obligations on time (as well as other factors that contribute to your credit rating, your interest rate offered on new credit requests will be lower.

If you find you are still paying higher rates, you might consider a Balance Transfer.

Benefits of a Balance Transfer

1.       You will save money in interest.

If you are one of those people paying a high rate on credit card debt, we feel your pain. Most credit card companies charge about 17.89% on their new offers, but some creditors will charge rates well into the 20% range. Overpaying for your debt is never a good idea. There are tons of options available with companies that charge fair rates for their credit cards. I always recommend checking with your credit union first. Our VISA Rewards Credit Card, for instance, has an introductory offer of 2.020% for 6 months - and wouldn’t you know it - we have a balance transfer promotion where cardholders can choose between 8.50% APR for the life of their balance transfer, OR 2.020% APR through December 31, 2021 (you can learn more about that by clicking here).

Bonus tip: Our VISA Rewards Credit Card rates are between 10.90% APR and 17.90% APR. Legally, credit unions can’t charge more than 18% APR, so I recommend ALWAYS check with one first (preferably us! :))

The really special thing about this card is that there are NO BALANCE TRANSFER FEES. If you have ever performed a balance transfer outside of InFirst FCU, you would know that just about every company charges a fee (either a flat fee or a percentage based on the balance transferred) for completing this transaction. It’s typically 3% - 5%. Ready for some math?

Transferring a $3,000 balance at 0% APR for 18 months plus a 3% fee, and you’ll end up paying $90 in balance transfer fees. That might not sound like a lot, but you only have 18 months to pay the balance off before the standard (higher) rate kicks in. Don’t forget, if you are planning to pay the full balance off before the introductory offer expires, your payment will need to be higher than the minimum monthly payment. In our scenario, your monthly payment will need to be $172 to pay that full balance plus the balance transfer fee before the period ends.

What happens if you are late paying for one month? What if you have an emergency and you can’t make a payment? In most cases, the company will take you out of the program and charge you the standard rate – let’s say 17.89% since it is the average rate these days. Don’t forget, you will still have that balance transfer fee added to your balance plus any late fees and accrued interest. It’s going to be even harder to catch up. Why? Because of compound interest.

Compound interest is a great thing if you have a savings account that earns dividends – it means that you earn interest on the interest you’ve already earned. When you apply that concept to debt, it’s not so great. This means that the interest added to your balance each month (assuming you don’t pay the balance in full each month) accrues interest.

Bonus tip: Paying off your credit card balance each month may or may not be the best idea. If you are trying to build your credit score, I recommend keeping a SMALL balance on your account for at least six months. This will help increase your credit score. Just make sure it’s not a large balance (remember, you are paying interest on balances unless you are in a promotional or introductory term) and that your credit utilization stays at or below 20%. Keep reading to learn more about credit utilization.

2.       You can improve your credit score.

You read that right. A balance transfer might help your credit score go up. Let’s say you have two credit cards, each with a $1,000 credit limit, but one has a balance of $400 while the other has a $0 balance. Ideally, you want your credit card usage (utilization) to be 20% or under, so having 40% usage on your first card is negatively impacting your credit score. You could transfer $200 of your balance to the other card, leaving you with two cards at 20% utilization, thus improving your score.

Final thoughts:

• If you are opening a new credit card to take advantage of a balance transfer offer, shop around first. Remember to look for “hidden” terms and costs. Things like an annual fee, capping the amount that can be transferred, and variable interest rates are not ideal.

• Reward yourself with a Rewards card! This might not apply to your balance transfers, but if you find a great card, you can use your credit card for purchases you already have to make and earn the rewards. Pay the balance off and voila – free money (or gift cards, merchandise, or travel points).

• Don’t open new cards during the mortgage process. Even if you want to transfer balances, wait until you are 100% done with your mortgage deal before making new inquiries on your credit. You would be amazed at the number of home loans that have to be put on hold (or worse – canceled!) because a consumer loaded up on credit card debt in the middle of the process. Hold off on any large purchases until after you’ve signed on the proverbial dotted line.

I want to hear from you. Please leave me a comment below or send me an email. You can also submit your questions for future Blogs. If I use your idea, I will deposit $50 into your account.

Krista Kyte is a personal finance blogger and personal banker with over 18 years of experience in the financial industry. Krista is passionate about helping our members understand their financial situations. She writes tips that will help consumers reach and maintain financial security, and start living the life they’ve always wanted.