Balance transfer credit cards have been all over the place lately. Catching the attention of millions of people with 0% promotional interest rates, these offers have spread like wildfire since their creation. As a personal credit card debt consultant, I have unfortunately watched as many of these consumers destroyed their credit scores and chances of getting out of debt soon. I’m not saying balance transfer credit cards are a bad thing either, they have helped millions of consumers achieve and maintain financial stability. The key is understanding what you are doing with these cards and making financially sound decisions as to whether you should or shouldn’t use them. Here are a few things that you should know that will help!
Why Are Balance Transfer Credit Cards On The Market In The First Place?
As with any product, when credit cards themselves became successful for 1 or 2 lenders, many other lenders started o jump on the band wagon and created balance transfer credit cards of their own. With so much competition in the market, lenders had to find a way to make their offers more appealing. They had to come up with fresh new marketing concepts that would be jaw droppers. Knowing consumers like to get things for free, many lenders started to offer rewards with their cards. Knowing consumers like savings, lenders created promotional interest rates. Eventually, the promotional interest rate credit cards evolved into products that would allow consumers to use the new card to pay off old debts with higher interest rates. This card is what we know know as balance transfer credit cards.
Why You Needed To Know That
So many consumers are caught off guard by promotional interest rates and they forget to compare other factors like standard interest rates, rewards, transfer fees and other fees they may have to pay. This is not an intentional bait and switch scam but, consumers need to be aware that credit cards are a lending product. Even balance transfer credit cards are designed to turn a profit. These are not FREE credit cards.
Balance Transfer Credit Cards Should Not Be Considered As A Debt Relief Option For Those Experiencing Financial Hardship
Throughout the past several years, there have been quite a few clients of mine that have asked, “What do you think about balance transfer credit cards?”. Although these may be an option if you are not going through a financial hardship, it is not for those who are. Balance transfer credit cards do provide low promotional rates and generally provide competitive long term rates as well and, you can consolidate multiple debts into them. However, to qualify for these cards, you must have a good-excellent credit score and your total revolving debts must be less than 10% of your annual income. If you are experiencing a financial hardship, I would suggest looking into financial hardship programs. (I recently wrote an guest post on this topic for Top Finance Blog, click here to learn more!)
Important Factors To Compare When Choosing A Balance Transfer Credit Card
It is not a good idea to choose the first balance transfer credit card you see, as with any lending option. It’s important to compare the different offers that are available to you. If you decide that balance transfer credit cards are the best option for you, comparing the following factors is a must!
Compare All Interest Rates – If you are going to have a long term balance after your promotional period, interest rates will most likely be the highest fee you pay on your card. Although promotional interest rates are fun, it’s important to compare the long term rates as well. Here are the different types of interest rates that balance transfer credit cards come with and the portions of your balance that they will be charged to:
Promotional Interest Rates – These are low, short term interest rates that can be charged to a portion or all of your balance depending on the promotion for the specific card. Once the promotional period expires, your balance will be charged the following interest rates.
Standard Interest Rates – Standard rates will be charged to balances accumulated through standard purchase. Any purchase where a product is exchanged for your credit card will be charged the standard interest rate.
Cash Advance Interest Rates – These rates are generally higher than the standard interest rate. They are charged to the portion of the balance that was acquired through cash transactions. Cash transactions include cash back at a store, wire money transfers or transfers to your bank account. Any transaction in which cash is exchanged is considered a cash transaction.
Default Interest Rates – The default interest rate is the highest interest rate you will find yourself paying. It is more of a punishment than anything else. You will only pay the default interest rate if you default on your balance transfer credit card. Late payments and spending more than your credit limit are a couple examples of defaults.
All Fees You Will Be Charged – In most cases, balance transfer credit cards don’t give you the first year free. You pay 0% interest but, you will generally pay anywhere from 3% to 5% to transfer your balance. It’s usually still a great savings but, it is important to know. Also, any credit card offer, including balance transfer credit cards will come with it’s own unique set of fees that will be charged to those who decide to use it. Before applying for any credit card, it is important to read the rates and fees section of the terms and conditions to be sure of any and all fees and rates you may be charged!