When it comes to managing debt, we don’t all necessarily need credit counseling, debt consolidation, or debt settlement. In many cases, we are able to manage our debts on our own. However, regardless of where you may be in the debt cycle, we all want to save money. Often times, borrowers look to balance transfer credit cards as a way to save money on their debts, following mainstream members of the blogosphere like Money Under 30 who offer hope of lower interest rates and fees. However, is this a good option? Do balance transfer credit cards really save you money? Well, that depends. Here are a few things you should consider when looking into balance transfer credit card options
How You Plan On Paying The Debt Off
For some, balance transfer credit cards are a no-brainer. Those that are able to pay their debts off while promotional interest rates will likely save a decent amount of money by transferring balances to a balance transfer credit card. However, not everyone will be able to pay off all of their balances within the 6 to 18 months of low or no interest provided by some of these offers.
If you’re unable to pay off your debt within 6 to 18 months, it doesn’t necessarily mean that this tool won’t save you money. However, it is important to think about a few additional factors to ensure that you are indeed saving, rather than spending more in the long run.
The Long Term Interest Rate
If you’re not going to be able to pay your debts off completely by the end of the promotional interest rate period, it’s important that you pay close attention to the long term interest rate that will be charged once the promotion expires.
You see, lenders that offer these types of cards use promotional low to zero percent interest rates as a way to attract new business. However, that shiney low interest rate will only last for a short period of time, and most borrowers forget that. The truth of the matter is that the real rate that matters is the long term rate you’ll pay on the card. After all, if the promotion expires and you find yourself paying more than you were paying originally, are you really saving money or did you just enjoy short term savings only to pay more in the long run?
The credit card or cards that you have at the moment may or may not charge annual fees. However, in the world of balance transfer credit cards, it’s not uncommon to come across an annual fee or two. If the account or accounts you are transferring balances from charge no annual fees and your new account does, these fees could end up eating into your savings.
Consider Transfer Fees
Banks aren’t going to take on a balance for nothing at all. While these specific types of credit cards often offer 0% interest, they are not fee free. In fact, one of the largest fees that you’ll pay on a balance transfer credit card is the fee to actually transfer the balance. That’s right, most lenders will charge fees for this process that range from 3% to 5%. On a $10,000 debt, that’s a fee that could range from $300 to $500, which will be immediately added to your balance. While the low interest may offset the fee, in some cases, the low rate for such a short period of time isn’t worth the fees associated with getting it.
While balance transfer credit cards are a great choice for many, they are not a one size fits all solution. If you’re considering this option, make sure to think about how long it might take to pay off your debt, compare the long term rate on the new account to the current rate, and consider other fees like transfer fees and annual fees to get an idea of whether or not you’ll actually save money.