© Nattanan Kanchanaprat

The Truth About Balance Transfers

It sounds really good doesn’t it? Go for a balance transfer as the smart and simple way to pay off any outstanding balances that you have. The problem is that this can seriously backfire on you if you do not do your homework properly. 

We would always recommend that you pay off your debts, but you need to perform due diligence in all cases. Consolidating your debt into another debt that offers 0% APR for a period of time is very tempting but do not rush into this!

Why decide on a Balance Transfer (or not)? 

There is nothing wrong with the concept of a balance transfer. It is a sound way to clear existing high interest debt in a faster way by moving you current balance to a place with lower interest (or even zero interest). It makes sense for your current payment levels to pay down the balance rather than pay interest.  

Although the concept is sound there are some things that you need to take into account. You may negatively impact your credit score with a balance transfer. This does depend on a lot of different factors but if you do make an application for a new credit card then consider these things:

  • How good is your credit history? If you have a score over 740 then this should help you to obtain a lower interest rate on a new card.  To secure a lower interest rate your income and a high credit score will be a factor. 
  • Are you prepared to risk hits on your credit report?  Every credit inquiry you make will negatively affect your credit score, and it could take you some time to recover this hit. 
  • You need to know that credit underwriters see making applications for numerous credit cards or loans in a short amount of time negatively. People that make multiple applications are “credit shoppers” and they are usually considered a credit risk.

You need to tackle all of these issues and research a balance transfer correctly. When you do this you can end up with a great deal. The ideal situation is to go for:

  • A credit card or loan with zero interest or lower interest than your current balance
  • A zero or low cost balance fee
  • A credit limit high with the new card which will cover your current outstanding balance
  • A long enough low interest period for you to pay off your current balance prior to higher rates of interest being applied

The most important advice that we can give you about balance transfers is this:

You need to avoid still having an outstanding balance once the low interest (or zero interest) period ends. If this is the case you will have to pay interest again on what is left of your balance.  So you need a plan to pay off your outstanding balance completely during the introductory low interest period.

Mistakes to avoid with Balance Transfers

Make sure that you do not make these balance transfer mistakes:

  • Not making an application for the best offer
  • Attempting to make a balance transfer using 2 cards from the same institution that issues them
  • Going for a balance transfer when you know you can’t pay off the outstanding balance within the low interest period
  • Hesitating for too long over a balance transfer

A True Balance Transfer Story

An individual had a number of credit cards with high interest outstanding balances. They looked closely at the interest rates and didn’t like this so decided to act…

So they got a copy of their credit reports to confirm all of the details were accurate.

After confirming this they shopped around for the 3 best credit cards that had a zero interest balance transfer of at least 12 to 24 months. They only made one application. By performing the right amount of due diligence they were able to get a new credit card with a zero interest balance transfer feature and the right amount of time for them to pay off the balance.

So they paid off all of the balances with their higher interest rate cards but they didn’t close any of the accounts. They formed a realistic plan to pay off their outstanding balances prior to the zero interest period expiring. 

You can use this process too as it is tried and tested and something that we recommend!

If you need any help or advice on credit issues then our experienced team would be delighted to assist you. Please contact us here today.