When you’re carrying a lot of high-interest debt, it’s hard to imagine how another credit card can possibly help your situation. However, the right kind of credit card – a balance transfer card – may actually provide some relief.
1. Extra Fee
Banks charge a one-time fee for a balance transfer, usually 3 percent to 4 percent of the total, applied when the transfer takes place, and added to the balance of your debt. But that’s a small price to pay: if your bank is charging a 20 percent interest rate on your debt, you’re paying 1.7 percent per month anyway.
2. Credit Score Will Go Down
Applying for a credit card results in a “hard inquiry” on your credit report, and each one of those causes a drop of three to five points in your credit score, according to Quizzle, a free credit score and report site.
3. The New Bank Could Increase Interest Rate at Any Time
An unfounded fear exists that banks can lure someone into a balance transfer, and then increase the interest rate months later. The Credit Card Accountability Responsibility and Disclosure Act of 2009 prevent banks from engaging in such devious tactics. Once you agree to a balance transfer at a set interest rate and period, you’re guaranteed the rate as long as you follow the rules. Banks can only cancel your promotional rate if you’re 60 days late with payments.
Some Important Rules of a Balance Transfer:
- Never miss payments.
- Complete your transfer. You usually have 60 days to complete your transfer or you’ll lose the promotional interest rate.
- Don’t spend on the card. Interest will immediately start accruing on the new purchases (unless there is a 0 percent purchase offer). But it is best if you just don’t spend since your goal is to pay off debt.
- Don’t use the card at an ATM. Never use a credit card for an ATM cash advance, but especially don’t do it with a balance transfer card.