Can You Use Balance Transfers to Pay Off Your Other Credit Cards?
Credit cards are a convenient form of payment for many consumers. The use of credit cards, however, can often lead to the accumulation of debt. This can be especially troubling if the existing credit card debt is at a high interest rate. A balance transfer can offer some relief by allowing a debtor to consolidate debt from multiple credit cards onto fewer cards or in some cases, onto one single card.
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Scores
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A balance transfer offer from a credit card company is based upon your credit score. The higher your score, the more likely you are to qualify for such offers. A FICO score is a three digit number that begins at 300 and goes up to 850. The higher this number, the better, and the less of a credit risk lenders will view you as. Balance transfers are not generally given to consumers with a low credit score.
Significance
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A balance transfer will allow you to transfer the debt from other credit cards to the new card. The paid off credit cards will report to the credit bureaus with a zero balance. The new card or cards will report the balance that you transferred to it from the previous cards. Be careful if doing a balance transfer onto one single card. Depending upon the credit limit of the new card, balance transfers can damage your credit score, according to FICO. This is because you go from having smaller balances on multiple cards to having a larger balance on one card. This can increase your credit utilization ratio and thus lower your score.
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Traps
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A balance transfer offer may seem like a good idea but it does pose a risk to your wallet. Most balance transfer come with a very low initial interest rate, usually zero percent. This is not permanent, however. The rate may last anywhere from six months to one year. If you don't pay off the transferred balance before that time, the interest rate on that debt will increase. A higher rate means you will pay more in interest, and this can cause the balance on the card to grow. Also, some credit card companies charge you a fee for the balance transfer.
Considerations
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The low initial interest rate that comes with balance transfer offers usually applies only to balances transferred from other cards onto the new card. If you use the card to make purchases, those purchases will often be at a higher interest rate. The good news is that the Credit Card Accountability and Responsibility Act of 2009 requires credit card companies to apply payment amounts in excess of the minimum payment to the higher interest balances first.
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References
- The Motley Fool: How to Win the Balance Transfer Game; Elizabeth Brokamp
- MyFICO: What's in Your FICO Score
- MyFICO: What's the Best Way to Manage Growing Credit Card Debt?
- Bankrate.com: 5 Balance Transfer Trip-Ups; Walecia Konrad; February 2007
- The White House: Fact Sheet: Reforms to Protect American Credit Card Holders
- myFICO: Credit Basics
