Credit Card Balance Transfers: Worth the Hassle?

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There’s no denying it. Americans love their credit cards. They’re convenient to carry and come in handy for unexpected expenses. Some even reward you with cash/points/travel miles just for using them. But far too many Americans face out-of-control credit card debt. Are you one? If so, isn’t it time to get out of the rat race?

Let’s look at the overall picture. According to Fortune.com, Americans have about $974.2 billion in credit card debt. That’s an average debt of $8,284 per U. S. household. Paying this amount back quickly, to minimize high interest charges, can be a real challenge. But here’s the good news:  A balance transfer is an option that can help reduce or even eliminate those charges entirely while you work to pay off your debt.

How Can a Balance Transfer Help Me?

Why would you want to go through the hassle of opening a new credit card and transferring your current debt balance from your existing credit card to the new one? For starters, the new credit card will typically offer an attractive introductory rate to new customers, depending on their credit score. You often see a card offering 0% APR (annual percentage rate) over the span of six to 18 months.

During this timeframe you could eliminate, or drastically reduce, your debt by making payments to the credit card’s balance while not incurring any interest payments. The amount of your debt will decrease and you’ll save money by eliminating the interest payments.

All credit cards are different, so keep in mind there may be a fee charged to complete the transfer, although some special promotions will often waive it. In addition, it’s always a good idea to be familiar with the company’s Terms of Service and the interest rate you’ll eventually be paying on the new card in case you don’t pay off the balance before the interest-free promotional period ends.

For example, say that Tom has a balance of $4,000 on his credit card with a 16 percent interest rate. If he paid $300 per month, it would take him about 16 months to pay off the balance. If he opened a new 0% APR credit card and completed a balance transfer, it would take him about 14 months to pay off the balance - including a 3 percent transfer fee. Altogether, he’d save $520!

On average it takes about two weeks to complete a balance transfer. During that time, you still have to make payments to the card company that currently holds your balance. Once the transfer is complete, you need to determine whether you should keep the old card or close it. If the old card is the longest form of credit you have, you might not want to close it because doing so could negatively impact your credit score. On the other hand, keeping it may tempt you to charge more. You’ll have to decide what’s best for you.

Will This Ultimately Affect My Credit Score?

The short answer is "yes," but it will be affected in different ways. Your credit score, commonly known as your FICO score, is rated by the Fair Isaac Company. (This is where the term FICO comes from.)  A score generally ranges from 300 to 850. Although the company doesn’t release information disclosing exactly how your credit score is calculated, we do know the weighting that is applied to the various criteria:

  • Payments history – 35 percent
  • Amount owed – 30 percent
  • Length of history – 15 percent
  • New credit – 10 percent
  • Types of credit – 10 percent


Thus, any time you open a new credit card, you acquire “new credit” and your score will be affected. However, maintaining a debt balance will also affect your score.  According to our information, the weighting for “amount owed” is greater than that for “new credit”.  So, using our example above, Tom will pay off his debt sooner, positively impact his FICO score, and at the same time, he’ll save money by eliminating the interest payments.

Summary

As with any financial decision, it’s important to weigh the pros and cons of a balance transfer as it relates to your specific financial situation. You must also do your due diligence when choosing a new credit card to ensure you are comfortable with the company’s terms. But, once you find the right one, it could save you money and even end up helping your credit score in the long run.

Austin Stagman is an Investment Analyst with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website or email Austin.

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