But if you have a pretty good credit score, a balance transfer could be an option that might help you pay down your credit card debt faster. Here’s how it works: You transfer the balance on your high-APR credit card to a balance transfer credit card that offers a zero percent introductory rate, which can last for six months to 18 months. You get to pay off your debt while paying zero interest for the introductory period.
Sounds awesome, right? It can be. But to pay down your credit card debt once and for all, you need to avoid the five most common balance transfer mistakes.
Mistake #1: You stop making payments on your old card too soon.
With a balance transfer credit card, your new credit card issuer will pay off the balance on your old credit card. However, the process can take three weeks or more.
If you stop making payments on your old credit card account too soon, you could end up making a late payment and incurring a late fee. Even after your new bank confirms that the transfer is complete, hop online and check the balance on your old credit card to confirm it’s zero.
Mistake #2: You don’t have a plan for paying off your credit card debt.
A balance transfer with a zero percent intro rate is a golden opportunity to get out of debt while saving on interest. If you don’t calculate your monthly payment, though, you could still be in debt when the intro rate ends.
Here’s an example of how to calculate your monthly payment:
Let’s say you’ve opened a balance transfer credit card that offers you an 18-month zero percent intro rate, and you want to transfer a $5,000 debt to your new card. The card has a 3 percent transaction fee. First, add the transaction fee to your original transfer amount, which makes the total $5,150 (5,000 x .03 = 150).
Occasionally, a card issuer will waive the transaction fee, but if you pay the fee, it must be included in your monthly payment calculation.
Next, divide that amount by the number of months in the intro period to calculate your monthly payment ($5,150/18 = $286.11). This is the amount you need to pay each month to pay off your credit card debt within the intro period.
Mistake #3: You use your balance transfer card for new purchases.
If you want to pay off your debt within the intro period, you must vow that you won’t make purchases with your new balance transfer card. Remember that monthly payment you just calculated? If your debt grows, that monthly payment won’t be enough, and you’ll wind up with a balance when the intro rate ends.
Plus, unless your new card also offers a zero percent intro rate on purchases, you could be charged interest on your new purchases if you carry a balance on those items.
Mistake #4: You make a late payment and lose the intro rate.
Your credit card agreement’s fine print usually specifies the circumstances that can cause you to lose your intro rate. In some cases, if you make a payment that’s one day late, you lose your intro rate. In other cases, you don’t lose your intro rate unless you’re over 60 days late, but you lose the intro rate and get stuck with a 30 percent penalty interest rate.
Do whatever it takes to pay your bill on time. Set calendar reminders on your smartphone, or set up automatic payments from your checking account.
Mistake #5: You close your old credit card account.
One of the factors the credit reporting agencies use to calculate your credit score is your credit utilization ratio. This is the amount of credit you’ve used compared to the amount of credit you have available. When you close a credit card, you lose the available credit associated with that card and your utilization ratio goes up. When your utilization ratio goes up, your credit score can go down.
Unless you have a problem with compulsive spending, I recommend keeping your old credit card account open. But don’t use your old card for new purchases. If your goal is to get out of credit card debt, step away from all of your credit cards and don’t use them until you are debt free.
Beverly Harzog is a nationally recognized credit card expert, consumer advocate, and the author of Confessions of a Credit Junkie: Everything You Need to Know to Avoid the Mistakes I Made. She runs a popular credit card blog on her website, www.BeverlyHarzog.com.
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