Is it Time for that Balance Transfer?

The average person with a credit card carries a balance of nearly $5,000 and experts expect that number to continue to rise.

January can be a rough month for consumers’ wallets as their holiday spending shows up on their statements. Many consumers have the intention—even the resolution—to pay down that debt, but what they lack is the funds to accomplish the goal.

Credit card companies know that consumers’ bank balances do not always match their good intentions. Consumers are flooded with enticing balance transfer options this time of year, and some even brag about having no fee.

Some companies offer balance transfers with a 0% APR for an introductory period that can last for up to 18 months. These “too-good-to-be-true” offers are often reserved for those with nearly flawless credit, so remember:  Just because a credit card company makes an offer, does not mean you will qualify.

However, if you have good or excellent credit though, these offers could help reduce payments. But the bigger question remains: Just because it looks enticing, is it going to bring you closer to your goal of paying off your credit card this year?

It could, but that depends.

First, do some math. Let’s say that you have a $5,000 balance on your credit card with an interest rate of 13% and you are planning to transfer the balance to a card with a 0% rate that lasts for 10 months.  By not paying interest for those 10 months, you are saving $540. If you had to pay a 3% transfer fee, subtract $150 from the $540 you saved. That leaves you with $390. If you qualified for one of the no transfer fee cards, good for you!

The Clock is Ticking

Once you sign up, the clock starts ticking. You only have the introductory period to pay the entire balance. After that, the 0% interest rate is gone and the ongoing rate, which could be the same or higher than your old rate, is your new reality. Don’t forget that if you paid a 3% transfer fee, you only have seven months to realize your savings because you paid $150 to transfer the funds.

To make sure a balance transfer makes the most financial sense, ask these questions:

Am I going to be able to pay it off? Unless you have a realistic plan to pay the full balance, stay with your current card unless the terms are so much better that it makes sense to change cards anyway.

What happens if I don’t pay the balance off? If you don’t pay off the balance, you will be forced to pay the interest rate for the card you selected. Make sure you know what that is in case you don’t pay off the entire balance. If you don’t think you can pay off the balance before the 0% rate expires, switch to a card that has a lower ongoing interest rate than the card you have now.

What about new purchases? Ideally, you won’t use your new card—or any credit card—for new purchases while you’re aggressively paying down the balance. If you do, check to make sure that new purchases are eligible for the 0% teaser rate.

What does the rest of the fine print say? If you make purchases with your new card, you may not have a say in where your payments go. The company may only apply the payments to the zero interest transfer leaving you paying interest on the new purchases until the 0 percent transfer is completely paid.

How many is too many? If you are close to the end of the introductory rate, you could transfer the balance again, essentially resetting the countdown. Each time you apply for a new card, a hard pull of your credit takes place, which hurts your credit score and can come back to hurt you when trying to make a big purchase.

Finally…

Understand this: Credit card companies don't offer to give you an interest-free loan because they want to help you realize your financial dreams. They know that in the majority of cases, you aren’t going to pay the full balance before the rate expires.

Before switching to a new card, have a realistic plan in place that will allow you to beat the odds. If you don’t have confidence in your ability to pay off the balance, stay with your current card unless the terms after the introductory rate are drastically better than your current card.

Roman Shteyn is co-founder of Credit-land.com. He writes frequently on credit-related topics.