There are many ways to get out of debt. If you have good credit, a balance transfer credit card might be one way to do it without much more additional work than what you are already doing.
Now you might be thinking that it’s a bad idea to sign up for another credit card when you are trying to pay off an existing credit card. If you are focused on the goal of becoming debt-free, doing a balance transfer could save you big bucks on interest and get your debt paid off faster by directing your payments to your principal rather than interest.
You can read more about how balance transfers card work and save you money on my previous blog post. There is also a calculator on there that will let you know whether it is worth doing a balance transfer.
Before you run hop online and start applying for a balance transfer credit card, know that banks and credit card companies aren’t offering these cards because they want to give you free money. They are really hoping you’d mess up so they can reap the financial rewards.
Be smart about balance transfers and avoid these common mistakes.
Mistake 1 – You pay your credit card bill late
Paying your normal credit card bill late is bad enough. Your credit card company immediately smacks you with a huge late payment penalty and you risk a ding on your credit score. Paying your bill for your balance transfer card late is even worst.
Many balance transfer card agreements will have a clause saying that missing your due date will result in the loss of your introductory 0% interest rate. Your interest rate will instead jump to the normal purchase rate for your remaining balance. If you are long overdue, you might even get hit with the penalty rate, which is usually around 29%.
All the work you had gone through for transferring your balance will be for naught. Don’t let this happen to you. Set up payment reminders or alerts on your phone or calendar and make all your minimum monthly payments on time. Or set up automatic payments so you won’t forget to pay your bill.
Mistake 2 – You stop paying your old card too soon
Even though you’ve submitted the balance transfer request with your new card, you still need to keep making the monthly payments on your old card by the due date until your new issuer pays off your balance. All your old credit card company knows is you’ve missed your payment deadline and they’ll hit you with a late payment fee.
Keep checking your online account for your card until it shows that your balance is paid off. If your account shows a credit, you can always request a refund or make a small additional charge to zero out the credit
Mistake 3 – You don’t pay off your balance during the 0% promotional period
Just like ice cream on a hot summer day, nothing lasts forever. The 0 percent APR for balance transfer cards usually lasts between 12-18 months. Then the welcome party is over and the rate shoots up to the regular purchase rate that can be in the teens to mid-twenties as determined by your credit score.
When you transfer your balance, plan for the long term and try to pay down your balance as much as you can during the zero interest intro period. If you do not expect to pay off your balance by the end of the promo period, transfer over high interest debts first and avoid transferring lower interest rates less than your regular purchase APR.
Depending on your credit in a year to a year-and-a-half, you could consider looking for another card to move the balance to when the intro rate ends.
Mistake 4 – You ignore the balance transfer fees
Most cards charge a flat fee or a percentage of the balance transferred that is between 3 and 5 percent, whichever is higher. This is an up-front cost that is charged as soon as your transfer is completed and is added to your existing balance.
You should use our balance transfer calculator and crunch the numbers to see whether it is worth the cost to do the transfer. You will actually get the most for your money the longer you take to pay off your balance. This is a complete opposite of what you are used to doing with credit cards and hearing me constantly tell you to absolutely avoid carrying a balance.
Take for example if you do a balance transfer with a 5% balance transfer fee and decide to pay off the amount after one month. You would have borrowed at 60% APR!
If you check around, you will sometimes find credit cards with no balance transfer fees. If the other card features are good, you have great credit, and you have a large balance to transfer, one of these cards could save you big bucks.
Mistake 5 – You forget there is a deadline for your balance transfer
Most balance transfers offers have a deadline from a month to four months after applying for the card. Each month that you wait is another month that you will be paying interest on your old card.
Should you miss the deadline, it could be a while until your new card offers you the ability to make another balance transfer. And immediately applying for yet another balance transfer card won’t look that great on your credit report either because to the credit card companies it will look like you are suddenly seeking a lot of new credit because you might be in financial trouble.
Mistake 6 – You use your old card for new purchases
You’ve cleared out the balance on your old card and it now has plenty of available credit. No matter how tempting it is to put a charge or two on it, avoid doing this at all costs. It’s easy to get yourself deeper into debt by telling yourself it’s only a small amount here or there.
Once you get into the habit for pulling out your old card for new purchases, you could find yourself with a rapidly increasing balance. It’s like the Pringles slogan, “once you pop, you can’t stop”. Not only do you have to pay off your balance transfer, you’ll then have another card you will need to pay off.
Take your old card out of your wallet and hide it away in a drawer. Or place it in a tub of water, stick it in your freezer, and freeze your credit.
Mistake 7 – You close your old credit card account
Relating to your old credit card, two FICO scoring factors that affect your credit score are credit utilization, which makes up 30% of the score, and length of your credit history, which makes up 15%. Keeping your old account open and using credit responsibly will help boost your credit score in the future as you keep paying down your balance transfer.
When you apply for a new card, your credit score will drop slightly initially. Your available credit however will go up because of the new card. As you pay down your balance, your credit utilization ratio will drop and help boost your score. Lenders want to see people who are able to use credit available to them wisely.
If your old credit card is your oldest card, it will also help your credit history because it increases your average age of your credit history. What you will want to do is use your old card maybe once a year to keep it active and pay it off immediately at the end of the month.
Those who are unable to resist using their credit cards should ignore this advice and cancel your old card. You want to kiss your debt goodbye not get deeper into debt.
Mistake 8 – You use your new balance transfer card for new purchases
Never assume that your new credit card offers a 0% interest rate for new purchases. There are some cards out there that offers the intro rate for both balance transfers and new purchases, but that is not the point. You want to get yourself out of debt and that means paying off your bills. You can’t do that when you are buying more things and keep adding on to your debt.
There is also a good chance you will not have a grace period when you put new charges on your balance transfer credit card. Usually when you pay off your balance in full within the 21 days between when your billing cycle ends and your payment due date, you do not owe any finance charges for the period. Since you are currently carrying a balance, you might not have a grace period and your new purchases will start racking up interest immediately.
Using your new credit card is what the credit card companies are hoping you would do when they entice you with a 0% promo rate.
Mistake 9 – You forget when your 0% interest period ends
This ties back in with Mistake #3. Twelve to eighteen months is a bit of time in the future but it will fly by quick. Plan ahead and use our credit card payment calculator to get an idea of how much you should pay each month to pay off your card in time.
Or you can simply take your total balance and divide it by the number of months. Pay that amount each month like clockwork and you will be debt-free when the intro rate ends.
Mistake 10 – You expect to make more balance transfers in the future
You’ve been approved for a balance transfer card with no interest for over a year. Some might think they can keep applying for new cards or offers as their promotional rate ends and transfer their credit card debt to the next card forever.
It could be done but there are many things that could come up. Your credit needs to be good to excellent. You are depending on credit card companies having balance transfer offers available in that time. There could be another recession. You could lose your job or have medical issues.
While you might save money in interest, each balance transfer will still cost you fees. The bank always wins.
A balance transfer could be your opportunity to get out of debt faster than usual. Avoid these mistakes and you could be on your way to having a positive net worth and being able to sleep easier.
It’s not always easy writing out checks each month for months at a time. Keep it up and it will become easier.
Do you have any tips and advice or things to avoid when doing a balance transfer?