Balance transfers are often done by people who want to shift from one credit card to another to avail lower interest rates or to get all their outstanding debt on to one card to avoid confusion and plan better. However, everything is not good about balance transfers and there are quite a few problems that could surface if one is not careful.
Your credit history might get affected
If you keep transferring your outstanding balance from one credit card to another, it will affect your credit history adversely. To start with, it signifies that you are not loyal to one credit card, which is something credit card issuers will not appreciate. Secondly, if you close your old credit card account, then you lose all the history that you have built with the other card over a period of time. Lastly you will have a new credit history which is shortened due to which even your credit rating goes down.
Your credit rating could be affected because of your credit limit
This is one problem which is not often considered by people. Your credit rating will depend on what your outstanding balance is, as a percentage of your credit limit. Close your outstanding balance is to your credit limit, worse your credit history will be and lower your credit score is likely to be. Therefore if you go for a balance transfer
and because of a poorer credit history with the older credit card, owing to your large outstanding balance, if you get a lower credit limit, you will end up reducing your credit score. It is a good idea to keep your older credit card open, although monitoring it from time to time. This way your credit history will be safe and your credit limit overall would remain high as well.
You could be misled about your initial term period
Many credit card companies often advertise the features of their card by showing the maximum period allowed initially when a low interest rate or 0% interest rate is levied on the outstanding balance. In fact, this is the time when balance transfer could be of any use at the first place. However, the initial period could be slightly misleading. This is because the initial long period could be long, between 12-18 months for those credit card customers whose credit rating is very high, and lower, around 6 months for those customers whose credit rating is lower.
You could end up facing a high interest rate after the initial period
This is one of the biggest disadvantages of going for a balance transfer. Although the interest rate is low or 0% during the initial period, the final interest rate which is what will come into effect for the longer run could be very high. This means if you are not careful in paying off all your outstanding balance, you might end up paying a lot of more interest.
You could end up with fewer rewards
A problem with many 0% balance transfer cards
is that they do not offer many attractive rewards or incentives at all.