“A good strategy if you already have credit card debt is to sign up for a balance-transfer credit card,” recommends Ted Rossman, industry analyst for CreditCards.com.
It can be a smart money move to transfer high-interest debt to a credit card with a 0 percent rate. Many people get frustrated that they can’t make a significant dent in their debt because so much of their monthly payment goes to interest. The average credit card interest rate is 17.21 percent, according to CreditCards.com. Of course, that’s just the average. Many lenders charge much more.
With a balance transfer offer, you need to beware of fees. The lender may charge an upfront balance transfer fee, typically 3 percent.
But with good credit, you can find cards that don’t have a transfer fee. Rossman pointed out three that don’t: Chase Slate, Amex EveryDay and BankAmericard. All three of these cards offer no interest for 15 months, as long as you transfer the balance within 60 days of opening the account.
“That’s a powerful tail wind that helps you get out of debt quickly at the lowest possible cost,” Rossman said.
So, if all things go as planned, an interest-free transfer offer can work out in your favor. However, here are three reasons I don’t recommend this strategy for some people.
● You haven’t changed your spendthrift ways. The woman who had asked the question admitted she had taken advantage of 0 percent transfer offers several times before. She was shocked when I chided her. But to me, her admission was an indication that she was repeatedly getting into more debt than she could afford.
“A lot of people get into a cycle of balance transfers, which can illustrate a lack of progress,” Rossman said. “I could perhaps see doing a second if you had a lot of debt and made a lot of progress with the first one, but still need a little more wiggle room. But I completely agree that these should not be used to kick the can down the road and balance-transfer hop. Debt management is as much psychological as it is mathematical. You need to change your mind-set and your lifestyle along with your financial habits.”
If you’re habitually charging consumer goods, meals out and financing other purchases on a credit card, I recommend you get off the hamster wheel of transfer offers and just pay off the cards you have with an aggressive debt-repayment strategy. Here’s a link to a column about my preferred “debt dash” method: https://wapo.st/37syfbe.
● You are unrealistic about your ability to pay off the debt before the introductory offer expires.
Although you won’t accrue interest, you still have to make every minimum payment on time.
The average credit card debt is $5,700, according to the Federal Reserve. Using this figure, let’s say the minimum payment due is 1 percent of your balance on the card with the temporary 0 percent rate. That starts at $57 due every month and declines slightly each month as you pay down your balance. But to pay off the balance in 15 months, you would have to make a payment of at least $380 every month.
If you make a late payment, you can lose the interest-free rate. And if you fail to pay off the balance before the offer expires, you may be hit with an even higher interest rate than the old card. For example, with the Chase Slate card, if you don’t pay off the balance within the 15 months, the interest rate could rise into a range from 16.49 percent to 25.24 percent, based on your creditworthiness.
● You plan to apply for a loan soon. If you’re in the market for a mortgage or car loan, you need to be careful about applying for a new credit card, which can bring down your credit score. Additionally, if the balance transfer will significantly increase your credit utilization ratio, this can also negatively affect your credit score, thus increasing the cost of the loan.
Three things have to be in place before a balance transfer can really be advantageous: You are no longer a spendthrift. You are relatively sure you’ve found money in your budget to meet the payoff plan. And you’ve become more disciplined and dedicated to paying off the debt. If you meet this trifecta, get the card.
Readers may write to Michelle Singletary at The Washington Post, 1301 K St. NW, Washington, D.C. 20071 or email@example.com. To read previous Color of Money columns, go to http://wapo.st/michelle-singletary.