Some people believe that consolidating debt into one payment makes life easier, and that ease should be applicable to all forms of debt, and especially to their credit cards. There really is no number of cards that are ‘too many’ when it comes to your credit score but keep in mind though; your credit score is based on your overall credit and how many credit cards in your wallet is irrelevant until you are unable to make the maintain a minimum payment on them.
Many people find themselves juggling keeping track of the payments and using a complicated system of payments may have caused missed or late payments. This is when you may be considering a Credit Card Balance Transfer to try to get your payment situation under control.
Depending on the interest rates on the cards you currently hold, on the surface, it appears like a good idea to transfer balances from a high-interest card to a lower one but there are 5 disadvantages.
Despite our best intentions, we think that transferring credit card debt from one card to another, to take advantage of a lower interest rate, is a step in the right direction. Once the monthly statement arrives and the balance is $0, we cannot but be tempted to then start using the $0 balance card for more purchases. This is a slippery slope, so once the transfer is complete, request the bank teller cancel that $0 balance card and cut it up quickly. It is wishful thinking to take that card home, lock it away, and ‘hold onto’ that unused credit for emergency purposes. Ultimately a great seat sale to Las Vegas in the cold Winter is going to wipe out the best of intentions!
2. Transfer Fee
Be mindful to inquire and calculate the transfer fees before proceeding. Initially, you may save on interest payments by transferring the balance, but if the card is carrying a large balance, a 3% balance transfer fee (typical in 2015) most likely will be applied. Also, ensure that that card you are transferring to does not have an annual fee or one that is adjustable based on the credit limit.
3. Transfer rates that expire
Companies that entice with a 0-5% the extra-low annual percentage rate (APR) give the illusion that if you transfer the balance to their new card, that you will save money immediately and in the long run. These cards often have a time limit on how long the extra-low APR time period is applicable for. Sometimes it is 6 months, a year, or maybe more. After that, the rate may match or exceed your previous rate, and if you were not expecting it, your budget will take a hit.
4. Transferring to avoid making a payment on your credit card
Postponing a payment may allow you to avoid the card payment this month but definitely not the next. If the timing is not right, you may end up missing a payment if the transfer is not complete when the payment becomes due. This lack of payment will have you looking for a short term lending company or payday loan company, with even higher interest, and start you in a cycle of using these companies to bridge the gap.
5. Effect on your current credit score
Opening a new account can impact your credit by adding a new inquiry to your credit report and by lowering your average credit age. Also, there is no guarantee that the new card will be approved, the credit limit received will be what you are seeking, and the ‘pre-approved’ offer of a lower rate does not actually mean that you have been pre-approved. Everyone in your postal code receives the same generic letter in the mail and the company decides after you have applied, but by then, the new query is already recorded on your credit report.
There are more questions that should be answered before considering whether a credit credit balance transfer is right for you. A final word of advice if you do decide to proceed – remember to keep paying your credit card payments until you receive a statement that says $0 owing, otherwise you may be charged a fee for late or neglected payment while the paperwork is processed.
Want to calculate how long it will take to pay off your credit card? Try the Credit Card Pay-Off Calculator from the Government of Canada.
Helen Siwak is Editor-in-Chief of BLUSHVancouver & EcoLuvLux Lifestyle Blog | Lifestyle contributor to Daily Hive (VancityBuzz) | West Coast contributor to Retail-Insider | contributing writer for Marble Financial.