Balance transfers help you save a lot of money on interest payments. However, such offers may have their own pitfalls. Watch them out!
Balance transfer pitfalls
Intro period has its timing. First and main, if you want to benefit from a balance transfer offer, mind a time window when you’re required to make the first balance transfer. It may be within the first two weeks or even four months of account opening, so check the card terms to know for sure.
If you miss the time limit for the first balance transfer, the offer becomes unavailable to you.
So, if a balance transfer introductory period lasts for 12 months, it doesn’t mean that you have a year at your disposal to make your first balance transfer to this card. It means that special terms will be applied to any transferred balance within a one-year period starting from your first balance transfer. Do it on time and it will work for you.
Transferring balance takes time, continue to make minimum monthly payments to your old card. Make sure you are aware of the following timing limitations:
- There is normally a period after account opening when no balance transfers are possible.
- Banks thoroughly consider balance transfer requests before approving them. This may take from several days to several weeks.
- Once approved, you may wait for several weeks for your balance transfer to be completed.
During this time, make your monthly credit card payments as usual to avoid extra charges.
Payment allocation policy. Avoid using the same credit card for both balance transfers and purchases. These activities may have different balances and APRs. And according to the most common payment allocation policy, this difference may result for you in extra charges.
For example, you have zero APR on balance transfers and a 15% APR on purchases and you carry both balances. When you make your monthly payments, they first apply to your balance with zero APR. And only the amount exceeding the minimum payment for the balance with lower APR goes to the balance with a higher APR. That amount may be not sufficient, and you will unexpectedly accrue interest on that second balance.
Some credit cards offer the same zero interest intro periods for both balance transfers and purchases. But it still may bring you into trouble. As a rule, an intro period on purchases starts with account opening and an intro period on balance transfers starts with the first balance transfer transaction. So there is always a gap when these two balances have different APRs.
Another pitfall is that you may lose your grace period for purchases if carry a balance after balance transfers.
Waived vs deferred interest. Attention please, ignoring this point may cost you a lot. If the length of balance transfer intro period is not enough for you to pay off your debt in full, mind the following:
- When some credit cards offer a zero interest period, they mean it. They don’t charge any interest within this time frame. After the end of the intro period, they start charging interest on the unpaid part of your debt. This is called waived interest.
- When other credit cards offer you a zero interest period, they don’t mean it but simply give you a break before charging interest. When the zero interest period ends and you still carry a balance, they charge you with interest for the whole period including no interest time. This is called deferred interest.
Don’t hesitate to contact your bank to clear up this point.
And the last. You cannot transfer balances between cards of the same bank.
Balance transfer is a fast decision. Once you’ve been charged with a penalty APR or interest rate have been increased for different reasons, act on the spot. Here is why:
- When your credit score is still pretty undamaged, you may qualify for a better balance transfer offers. But you have not that much time. You have only one month to repay a missed monthly payment before it’s reported to credit bureaus. And you have only half a year of nonpayment before your debt may be sold to a collection agency. A missed payment may make your credit score drop just a little bit, but an account in collection does real damage to your credit history.
- Another point is that acting promptly, you save more money on interest payments. Increased interest rates may significantly slow down your debt repayment. The largest part of your monthly minimum payments will contain pure interest. While no interest balance transfer offers give you up to two years to repay solely your debt.
The bottom line
Take your financial situation under control as fast as possible. You goal is to get a better balance transfer credit card before your credit score drops and save your money and your creditworthiness.