Everyone makes money goofs now and then. Sometimes, that means charging a bit more to your credit cards than you intended.
Trouble is, it can be difficult to climb out of even a small amount of credit card debt. The good news, of course, is that—as long as you have a good credit—using a balance transfer credit card offer can help you escape your balance before the debt quicksand starts to really take hold.
The best balance transfer credit cards offer an introductory 0 percent APR on transferred balances for up to 21 billing cycles.
Some balance transfer cards—the Discover it® Balance Transfer included—even come with competitive cash back programs. That means you can get a new credit card that will be valuable even after your balance is paid off. But that also presents a risk. Those rewards may entice you to make purchases on the balance transfer credit card while you’re still paying off your balance.
Though possible, in most cases, you should not make purchases with a balance transfer credit card until the balance you transfer is paid off.
As great as those rewards may seem, it’s best to avoid using the card for everyday purchases while you have a balance on it.
Here’s some of the other dos and don’ts of using a balance transfer card.
Do pay off the card during the promotional period
The point of a balance transfer is to take advantage of the introductory 0 percent APR period. If you don’t, you’re left with another credit card that has high interest payments.
It’s important to know and understand what your payments will be when considering a balance transfer. As many as 33 percent of people don’t pay off their balance during the promotional period.
Use Money Under 30’s balance transfer calculator to estimate your payments and choose a card that will allow you to repay your balance before the promotional period expires.
Do not make new purchases with a balance transfer card
Using your balance transfer card to make purchases while you’re still paying off a debt is not a good idea.
For one, you’re adding to the very balance you’re trying to pay off. But you may also create a situation in which you must pay interest on those new charges.
Here’s what happens. If you transfer a $5,000 balance at an intro 0 percent intro APR and make a $500 purchase at a 16 percent regular APR, your $5,500 total balance is subject to two different interest rates—0 percent and 16 percent.
In such situations, the Credit Card Act of 2009 prohibits credit card companies from applying all of your payments to the portion of your balance at the intro 0 percent APR first. This is what the banks used to do. So you would end up paying 16 percent APR on the $500 new purchase until the entire balance at 0 percent was paid off—only then would your payments begin reducing the $500 balance.
But the language of the act is more complicated than it seems. The fine print requires the card issuers to
“…apply any amount over your minimum payment to the portion of your balance with the highest interest rate but the minimum payment itself can be allocated however the card issuer wants. That means your minimum payment may go toward reducing the interest-free portion of your debt, not new purchases that may carry a high rate.”
So, as long as you’re paying more than the minimum required payment, your payment will pay down charges at the higher interest rate. But if the bank applies your minimum payment to the portion of your balance at the 0 percent APR, you could still get hit with finance charges if you don’t pay off the new charges in full in the month you made them.
Obviously, the potential cost depends on how much you charge.
Rewards offered through most balance transfer cards make you want to spend, but it’s far cleaner to transfer your balance and pay it off before putting new charges on the card. If you must make new charges while you’re paying down a balance, use a separate credit card. Pay off the charges immediately, if you can, or look for a credit card that offers an introductory 0 percent APR on purchases.
Do not close your other credit card accounts
Closing a credit card you’ve just transferred a balance from is bad for two reasons:
- It’s erases your long-time credit history. A longer credit history is viewed more favorably.
- It can hurt your credit-utilization ratio, which is the amount of debt you have available for credit limits.
Instead of closing your cards that now have no balance, use them for everyday spending or emergencies instead of your balance transfer card.
Your old cards have lower APRs than you would for purchases on your balance transfer card. But make sure to pay off the balance in full at the end of each month to avoid getting yourself into even more debt.
Do keep your balance transfer card after the balance is paid off
If your balance transfer card offers decent rewards, you should consider keeping it after your balance is paid off.
The Discover it® Balance Transfer offers rewards that make the card well worth keeping. The Discover it® card offers a See Terms interest for See Terms on balance transfers and for See Terms on purchases. After that, the standard APR of See Terms applies.
This intro APR offer sounds good, but it’s still a bad idea to spend on a balance transfer card no matter the promotional period, especially if you aren’t able to pay off the full payment every month. It’s best to wait until you’ve paid off your balance to start using the ample rewards Discover offers.
One of the rewards Discover it® offers is 5 percent cash back in rotating categories each quarter like gas stations, Amazon.com, restaurants, wholesale clubs and more, up to the $1,500 quarterly maximum each time you activate. Plus, unlimited 1% cash back on all other purchases, automatically.
Another benefit of the card is its lack of fees. There’s no annual fee, foreign transaction fee, overlimit fee, or late fees for your first late payment.
If possible, use a new balance transfer credit card solely for the balance transfer itself. It’s best to use another card to make everyday purchases and then pay off the card in full at the end of each month.
If a balance transfer offer also offers a 0 percent intro APR on purchases, the promotional period on purchases may be shorter than the promotional period on balance transfers. After that, the regular APR will apply and you may end up paying interest on the new charges.