Should You Consolidate Credit Card Debt?
Having multiple credit cards with outstanding balances can be frustrating. You may find yourself doing complicated calculations, trying to figure out how to break down your payments so that you minimize how much interest you’re charged. Most people in this situation consider consolidating their credit card debt with a balance transfer card. Is this a good financial move? In most cases, the answer is ”yes”. Balance transfer credit cards can save you hundreds of dollars by deferring interest charges for 12, 15 or even 21 months.
However, as with all credit card applications, you shouldn’t rush into a decision. A slow and measured approach is always best. Make sure you take the time to understand what is best for your given scenario, and make sure you go through the following considerations.
The transfer fee will (likely) pay for itself.
One of the major issues people may have with moving their balance to one credit card are the transfer fees involved. This will typically be between 3% and 5% of the total amount being transferred. The fee is a one-time charge that is applied to your total outstanding amount due after the transfer. However, it should be noted that the money you can save by deferring interest payments will, in all likelihood, quickly outpace the transfer fees involved – this typically takes just 4-5 months of deferring your interest payments. For example, imagine a $10,000 outstanding balance with an APR of 17%. After three monthly payments of $500, the cardholder would be charged roughly $388 in interest. Performing a balance transfer with a 3% fee would cost just $300; therefore you’d be saving $88 in that timeframe. Some of the best balance transfer credit cards waive the transfer fee. However, they usually do it at the cost of a shorter 0% APR period.
Consider the ongoing interest rates.
Don’t let yourself become blinded by the flashy ‘0% APR’ period – especially if you expect to continue paying down your balance well after it the promo period ends. Balance transfer credit cards are not the same as 'low interest cards'. The latter specifically refers to credit cards with low ongoing APR. The former, on the other hand, simply describes credit cards with promotional offers on balance transfers – such as 0% APR or waived transfer fees. While some balance transfer cards can be low interest cards, not all of them are. Most issuers will display the ongoing APR next to the promotional offer.
When paying down a balance, don’t add any new purchases to it.
If you’re trying to pay down credit card debt you consolidated onto a balance transfer card, your top priority should be getting rid of it. Any and all payments you can afford to make should be going towards your card bill. What happens when you make purchases while in the middle of a promotional zero APR period? Your issuer is legally required to apply your payments towards the balance accruing the highest interest first – which means you will not be paying down the principal balance you originally were targeting. You will be most successful when sticking to a rigorous payment plan, and not further ballooning your debt.
Know that you won’t be able to transfer balances between cards of the same bank.
Once you decide to consolidate your credit card debt onto one card, know that you cannot move balances within the same bank. Buried deep in the terms & conditions of credit card agreements is a stipulation that the bank “will not process any balance transfer requests that are from any other account or loan that we (the bank) or any of our affiliates issued.” That can somewhat limit your options when moving balances around, especially if you already have credit cards opened with multiple different banks.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.