The content is accurate at the time of publication and is subject to change.
A lot of credit card holders who have a high outstanding balance go for balance transfers. A balance transfer is an offer where an individual can pay off the debt on one card with another card, so that the balance is transferred to the new credit card. Customers are tempted to do this because a lot of credit card issuers offer a whole range of incentives as part of balance transfer offers. One of the most attractive offers is the 0% introductory rate in which case, card holders don’t need to pay any interest on their outstanding balance during the introductory period which could last from 6 to 18 months or even more depending upon the credit rating of the individual. However, not all balance transfer offers are really as beneficial as they seem and the card holders need to be careful due to some of these reasons.
Cost of a balance transfer
Although one gets to see the benefits of balance transfer in the form of 0% or low interest rates, what one has to take into account is the cost involved with a balance transfer. More often than not, balance transfer credit cards come with a balance transfer fee which could be as high as 5% of the outstanding balance. That could turn out to be a substantial amount especially when the outstanding balance is in excess of $1000. Moreover, a lot of credit cards also come with an annual fee in excess of 75 to 100 dollars adding to the cost. Credit card companies also try to make up for the lost interest in the form of higher penalties and charges that include late fees, over draft fees, currency conversion and cash advance fee to name a few.
Frequent balance transfers are not good for credit rating
If you are involved in frequent balance transfers, your creditworthiness might not really be appreciated enough. If card holders see a pattern in the way you go for balance transfers, you might be seen as someone who isn’t really trustworthy.
Balance transfers to cards with lower credit limit
This could have an adverse effect on your credit rating. This is because credit rating depends on your credit utilisation ratio. If you transfer your debt to a credit card with lower credit limit and close your older credit card account, you would effectively be using a greater part of your available credit. Credit utilisation ratio will increase and your credit rating will be adversely affected.
Loss of credit history
If you keep transferring your balance from one credit card to another and close the older one, you stand to lose credit history. The longer the credit history, the better it is for your credit score. For that you need to have a consistent credit history with as few credit cards as possible.
Introductory period might not be same for everyone
The introductory period for someone with excellent credit history could be 18 months, but for someone with bad credit history, could be just 6 months.
