The use of credit cards can assist in improving one’s credit score as well as provide spending power to consumers.
In the event that you have accumulated a high balance and are unable to repay it in a timely manner, a balance transfer credit card may be able to offer you some relief.
A balance transfer credit card can offer a low or even 0% APR promotion, making it easier for you to pay off your credit card debt and save money in the process.
Risk 1: Your credit rating is affected
Each time you apply for a new credit card, the issuer runs a hard inquiry on your credit report, which can temporarily lower your credit score by a few points.
In addition, if you transfer a balance from a higher limit card to a lower limit card, your credit utilization ratio, which is the percentage of your credit limit that you are using, may change.
Risk 2: Most cards charge balance transfer fees
There are some exceptions, but most balance transfer credit cards charge a balance transfer fee, which typically ranges from 3% to 5% of the transfer amount.
So, if you transfer $5,000 from one card to another, the card issuer would typically add between $150 and $250 to your balance.
Risk 3: It doesn’t solve the core problem
Using a balance transfer card will not resolve the issue of overspending on your credit cards. In the event that you do add more debt to your existing debt by making purchases, this could only make your situation worse.
Consider reducing or even eliminating your credit card spending while paying down a balance transfer in order to mitigate this threat. Furthermore, it is also recommended to avoid making new purchases on the balance transfer card until the transfer has been repaid in full.
In the event that you make a payment in excess of your minimum payment, your highest interest rate balance will be paid first.
As a result, if you make new purchases that accrue interest, any payment above the minimum will go there first, making it more difficult to pay down the transfer balance.
In some cases, it may make more sense to use a personal loan to consolidate your credit card debt instead of a balance transfer card.
Personal loans don’t come with introductory 0% APR promotions, but they do provide a set repayment term, which you won’t get with a credit card.