Should You Use Balance Transfer Credit Cards to Pay Off Holiday Debt?
Many people feel apprehensive in the month of January. The days are short, the gym is crowded and if you weren't cautious in December, the January credit card bill might pack a wallop.
It's really best not to finance holiday giving and celebration on credit -- set a calendar alert reminding yourself of that for Thanksgiving next year. But if you have a credit card bill that you can't pay in full by the due date, you need to deal with it right now.
Making payments and paying interest on the balance is an option, but it's not necessarily the best option. Finding a 0 percent interest balance transfer offer for a new card might be a better one.
It might feel desperate, and even shady, moving balances around from card to card. Like I said, it's better not to have a credit card balance in the first place. But now that you have one, moving it over to a card with an introductory interest-free period can be a good idea.
According to Experian, such a move won't hurt your credit score in the long run, and might actually improve it. Applying for a new card will put an inquiry on your report, which may cause a small short-term dip in your score. But once you have the card, your pool of available credit is larger, which is good for your score. More importantly, not having to pay interest should help you pay off the debt more quickly. This will improve your credit score by decreasing your credit utilization ratio -- a factor used to calculate your score.
That said, this is a one-time, get-out-of-jail-free card. If you continually apply for new cards, you're going to get dinged for having too many credit inquiries on your account, and it could negatively impact your chances of applying for a home mortgage or other loans. The goal here isn't to avoid paying the debt forever, just to buy yourself a little time to pay it off without accruing interest.
Keep these caveats in mind when deciding if a balance transfer is the route for you:
1. You usually need a good credit score to qualify for 0 percent interest offers.
Zero interest balance transfer credit cards require excellent credit. According to Credit Karma, the average credit score of approved applicants for the Citi Double Cash Card, their top-ranked 0 percent interest card, is 712. If you have a lower score, you still may be able to save money by transferring your balance to a card with a low APR. You can also call up your current card and ask them to lower your rate.
2. Balance transfer fees could eat up some of the savings.
A balance transfer fee of 3 percent is common, but you can negotiate that. Better yet, look for offers that promise no-fee transfers.
3. Keep an eye on the calendar.
Your window for transferring a balance with a no-interest period, with no fees, may be limited -- say to the first 60 days. Also make sure to read the new card's fine print. You may find that making a late payment ends the interest-free period.
4. Closing the old card could negatively impact your score.
Credit rating agencies like to see long-standing credit accounts, and your average age of accounts is one factor of your credit score. If you are worried about your score, consider keeping the old card open after the transfer. Just don't use it to rack up new debt.
5. New purchases on your new card may accrue interest, even if you pay them off every month.
This is a tricky one. Some balance transfer offers extend their 0 percent interest to new purchases, but others don't. For those that don't, you may find yourself paying interest on new purchases, starting from the day you make them. Normally, credit cards offer customers an interest-free grace period stretching from the day of purchase through the bill's due date. But if you carry a balance, this grace period can be yanked -- and that promotional transfer is a balance.
With these caveats in mind, go forth and shop for a zero-interest or low-interest place to stash your holiday debt awhile. But as soon as you finish paying off this year's holiday purchases, do yourself a favor and start putting away a little bit each month, so that next year you can pay the old-fashioned way -- with cash.
Next January, you will thank yourself for your thoughtful gift.
Greg Go is the co-founder of Wise Bread, an award-winning personal finance and credit card education blog, where you can find tips on how to find the best travel credit cards.
