Not sure if a balance transfer credit card offer is right for you? Laura explains what a transfer card is, the pros and cons, and when it can help you save money. You’ll learn smart tips to cut your interest expense and get out of debt faster.
Let’s say your monthly auto payment is $500 and you have about $8,000 left to pay off over the next 18 months. If you transfer your loan balance to a card that offers 0% interest for 18 months with a 3% transfer fee, you’ll come out ahead.
Simply divide your debt balance, plus any transfer fee, by the number of months in the promotion. That shows you how much to pay each month to wipe out the balance in time.
For this example, your balance plus the 3% fee would be $8,240 ($8,000 x .03 = $240). Dividing $8,240 by 18 months gives you a $460 monthly payment.
If you pay $460 a month to the card during the 18-month promotional period, you’d keep the car’s original payoff schedule and save more than $1,000 in interest! To figure a loan’s interest expense it’s easy to use the Loan Amortization Schedule template in Excel.
The bottom line is that you must have a solid exit strategy for paying off your balance before the promotional rate on a transfer card disappears.
How Using a Balance Transfer Credit Card Affects Your Credit
A common question about using a balance transfer card is how it affects your credit. A top factor in your credit scores is how much debt you owe on revolving accounts (such as credit cards and lines of credit) compared to your available credit, known as your credit utilization ratio.
For instance, if you have $2,000 in debt and $8,000 in available credit, you’re using one-quarter of your limit and have a 25% credit utilization ratio. It’s calculated for each of your revolving accounts and as a total on all of them.
I recommend using no more than 20% of your available credit in order to build or maintain optimal credit scores. Having a low utilization shows that you can use credit responsibly without maxing out your accounts.
Getting a new balance transfer credit card (or an additional limit on an existing card) instantly raises your available credit, which lowers your credit utilization and boosts your scores. Likewise, the opposite is true when you close a card.
In other words, closing a card after transferring the entire balance may seem like a good way to clean up your financial life; however, it comes with unintended consequences. One is that closing a credit card instantly shrinks your available credit, which spikes your utilization ratio and causes your scores to drop. So, instead of canceling a paid-off card, make a strategic decision to file it away or use it sparingly for purchases you pay off in full each month.
Another factor that plays a small role in your credit scores is the number of recent inquiries for new credit. So, applying for a transfer card typically causes a small, short-term dip in your credit. Having a temporary ding on your credit usually isn’t a problem, unless you have plans to finance a big purchase, such as a house or car, within the next six months.
So, remember that if you don’t close a credit card after transferring a balance to a new account, and you don’t apply for other new credit accounts around the same time, the net effect should raise your credit scores.