Balance transfers can be effective ways for moving unsecured debt balances to creditors willing to provide a lower rate. Even if you get a lower rate, however, there are other things to consider.
We know that some balance transfers are good for life as long as you avoid any default triggering events. Other balance transfer offers have lower rates, but those rates expire in just a few months. Still, the savings may justify the extra cost of balance transfer fees.
Just as other credit card fees have increased over the years, balance transfer fees skyrocketed in 2007. Most creditors avoided balance transfer fees prior to 2007. Now, these fees have gone up to 3 or 4 percent of the transferred balance.
Balance transfer fees used to be capped at around $50 per transaction. Now, these caps have gone up to $250 or more. Some creditors have removed a cap altogether.
When calculating savings, you may still be justified in transferring a balance in order to reduce your finance charges. Some rate offers are simply too good to pass up when you are trying to pay off debt.
The danger that most people do not realize is that when you transfer a balance, the fees become an additional part of your minimum payment for the following month. This can double or triple your minimum payment above what you were expecting. If you cannot afford the minimum payment that month, then you will likely lose the good rate you were chasing in the first place.
This is how it works. Your minimum payment is calculated by adding all finance charges and fees, plus a percentage of your balance. This percentage is usually one percent. Most credit card minimum payments are around two to three percent of the balance, which is up from 2005. Adding in four percent of a transferred balance can cause your minimum payment to increase to around six percent.
Sure the minimum payment will drop the second month, but only if you are able to make the higher minimum payment for one month. Most people that are transferring balances do not have extra money in order to absorb the extra transfer fees. This causes them to ball behind on one of their payments, which can cause all interest rates to go up.
If you do a balance transfer, make sure you read the terms. Be prepared to pay those fees immediately!
Kenneth Long began his public service with nonprofit organizations in 2001. He has since conducted workshops teaching other nonprofit executives how to integrate credit counseling with volunteer tax preparation programs. Long is a graduate of the University of North Carolina at Chapel Hill and received his Certificate in Nonprofit Management from Duke University.
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