 How to Avoid a Balance Transfer Mistake
A 0% balance transfer provides a great opportunity to save money on interest. However, there are a few pitfalls one must avoid to insure a 0% balance transfer doesn’t become a balance transfer mistake. Fortunately, avoiding these pitfalls is easy. Here are
- Continue to make payments on your old credit cards until your new credit card has completed the balance transfer. It can take anywhere from a few days to a few weeks for a balance transfer to clear with your old credit card company. Until it has, don’t neglect bills from your old credit card. If, for example, you are late on a payment to your old credit card, that company may report you as delinquent to the credit reporting agencies. This can have a severe, adverse impact on your credit score. Additionally, paying late may trigger an automatic default, and your interest rate could rise to 30%. With banks using every tool in the book to raise interest rates, its better to play it safe. If you overpay your old credit card, simply use it as a debit card or request a check.
- Pay your new balance transfer bill on time. Obviously it is important to pay your credit card bills on time. However, with a 0% introductory rate it is even more so. Why? Because the fine print states that a late payment can void the 0% offer. In other words, if you miss a payment, you lose your special 0% rate. Additionally, credit card companies have become increasingly unwilling to forgive people who pay even a day late. Consumers with excellent credit who have never missed a payment in their life will be surprised to see how little it takes to get your interest rate increased to 29.99%, which is the average default interest rate amongst the majority of major credit card issuers.
- Don’t run up a bill on your old credit card and waste money paying interest on new purchases. In early 2008, a number of credit cards offered a 0% interest rate on purchases and balance transfers. Today, there are still a few of these 0% on everything offers available. Thus, if you know you will be making more credit card purchases soon, apply for a credit card that offers a 0% APR on purchases and balance transfers, rather than running up a bill on your old, high interest credit card. For information on credit cards that offer a 0% APR on purchases and balance transfers, you can review offers here.
- Don't cancel your old credit cards: Unless your old credit cards have annual fees, closing those accounts can have a negative impact on your credit score. The reason for this is quite simple. 30% of your credit score is based on your credit utilization ratio. In a nutshell, this is the percent of available credit you are currently using. A person with $2,000 in debt and a total credit limit of $10,000 has a 20% ratio, which will positively impact your credit score. However, a person with $2,000 in credit card debt and a $3,000 credit limit is using 66% of their available credit. This makes that person appear to be maxing out. For more information on the relationship between balance transfers and credit scores, please see this article.
Avoiding these balance transfer pitfalls shouldn't prove too difficult. Oftentimes, these mistakes are made because of a simple mistake, such as forgetting to pay your credit card bill before going on a vacation. However, as banks aggressively pursue any and all options they have to raise interest rates, it is imperative that the pitfalls above are avoided.
Hopefully, now that you know what not to do, you are prepared to maximize the savings a 0% balance transfer credit card provides. If you need more information, there are a number articles available in our credit card articles section you may find helpful.
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