Transferring your credit card balance can be an effective way to reduce your overall credit card debt. However, there are some things you should consider before taking advantage of such offers.
Saving money
Zero percent offers could potentially save you quite a bit of money. For example, over the course of a year, someone with a 15% interest rate on a $10,000 balance could save $1,500 by transferring their balance to a card with a zero percent interest rate.1 Even a low interest rate balance transfer could provide some savings if you’re current rate is higher.
Get out of debt faster
Transferring multiple credit card balances to one card with a zero percent interest rate can help you pay off credit card debt more quickly. This is due to the fact that your entire monthly payment will go towards principal rather than interest. As an added benefit, any extra cash you’re able to free up by consolidating your debt could be used towards making extra payments each month, getting you out of debt even faster.1
Credit card perks
Many credit cards offer perks such as discounts, miles and points, cash back, etc. Therefore, transferring your balance to a card that offers these benefits allows you to take advantage of these rewards for spending you’re going to do anyway.1
Fees
Most balance transfer offers charge a fee based on the amount of the balance transfer, typically ranging from 2-5%. You should also be aware that most cards don’t have a cap, so the more you transfer, the higher the fee. It’s best to run the numbers and make sure that the cost of consolidating your debt is worth the fee.1
Qualifying
Typically you need to have a good credit score, somewhere in the range of 700 or better, in order to qualify for a balance transfer. However, even if you get approved with a lower credit score, sometimes the credit line may be smaller than what was advertised.1
Impact on credit score
“Applying for a new credit line generates an “inquiry” on your credit report, which usually dings your credit score for a short time. Even if you just shift debt around – as opposed to adding to your debt levels – your credit may still be affected.” However, over time a credit card balance transfer can actually boost your score since “the more available credit you have and are not using, the higher your credit score.”1
Temporary low rates
Many zero percent offers are temporary, lasting anywhere from 3-6 months. Some offers may last longer (i.e. 12-18 months), so make sure you read the fine print and ask questions.1
Misleading offers
It’s important to read the offer carefully because sometimes zero percent credit cards are actually deferred interest rate cards disguised as low rate offers. “Interest accrues on deferred interest cards, but you are not charged the interest if you pay off the balance in full by the zero percent deadline. By the end of the promotional period, if you do not pay off the balance, the interest is capitalized onto your remaining balance, so in the end, you end up paying a high rate on a higher balance than you originally had.”1
If you’re looking for additional ways to pay off debt or create extra cash flow, a reverse mortgage may be an option. A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration insured loan. A HECM enables seniors to access a portion of their home’s equity to obtain tax free2 funds without having to make monthly mortgage payments.3
If you’d like to learn more about reverse mortgages and see if you’re eligible, please use our Reverse Mortgage Calculator or call 800-218-1415.
1 10 Things You Should Know About Credit Card Balance Transfers – aarp.org, by Lynnette Khalfani-Cox, 6/12/13, http://www.aarp.org/money/credit-loans-debt/info-06-2013/tips-on-credit-card-balance-transfers.html
2 Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.
3 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.
Author: Meredith Manz