If you have good credit, chances are you receive some enticing balance transfer credit card offers in your mailbox. Will they help you pay off debt? They could!
A balance transfer can be a good tool for helping you save on higher-interest debt, but it's smart to make sure you understand the details before making the jump. Here are 10 questions to ask when considering a balance transfer:
What is a balance transfer?
When you transfer a balance from one card to another, you're essentially paying off the first card with the second. Transferring your debt to a lower-interest card can help you save money and pay off debt faster.
Can I transfer a balance among different cards from the same financial institution?
You typically can't use balance transfer offers to transfer balances among different cards from the same financial institution—this includes Navy Federal.
How much will it cost?
Balance transfer offers without a fee are hard to find, but they're out there. Navy Federal doesn't charge a balance transfer fee on any of its cards. More typically, balance transfer fees are around 2 to 5 percent of the balance transferred (so $100 to $250 on a $5,000 balance). Read the fine print to determine if there are any other fees, such as an annual fee for the account.
Which balance are payments applied to?
If you have both a transferred balance and a purchase balance, both with different interest rates, most issuers will apply your minimum payment to the lowest-interest debt first, typically the transferred balance. The Credit CARD Act of 2009 requires issuers to apply payments above the minimum to the highest-interest debt first (generally new purchases). Ask your lender about its specific policy.
Does the promotional interest rate apply to new purchases, too?
Be aware that new purchases may have their own interest rate. Check the offer details to see whether the promotional rate applies to other types of transactions, too.
Does the interest rate expire?
Many balance transfer offers have a promotional rate for an initial period of time, anywhere from 6 to 18 months. Be realistic about your debt payments—will you be able to pay off your balance before the introductory rate expires? A low, teaser rate will likely change to a higher interest rate once the promotional period ends. If you still have a balance, you could wind up paying more than you would have before the transfer.
What is the balance transfer limit?
The balance transfer limit will be listed in the offer. You can still make a transfer even if your current balance exceeds the offer limit. What it means, though, is that you'll have a remaining balance on your existing card and need to continue making payments there in addition to making payments on your new balance transfer card.
Will it hurt my credit?
If you use a balance transfer to help you pay down debt, you could actually improve your credit score by increasing your available credit while reducing your overall debt. However, if you close the first account once it's paid off, and the balance on the new account is close to the credit limit, you may see your score decrease until your balance is paid down. That is because you'll have a higher credit utilization rate (the percentage of available credit you're using). Also, because part of your score is based on the length of your credit history, closing an account you've had open for some time may hurt your score. Your best bet may be to keep the first card open as you pay down debt, making small charges and paying your balance in full each month.
Will I qualify?
If all the numbers work and you're ready to move forward, keep in mind that you still have to qualify. The lowest teaser rates are available to those with the highest credit scores (typically in the 700s). Even if your credit score is lower than that, you may still qualify for a promotional rate that is lower than what you're currently paying.
Can I transfer the balance again?
If you haven't paid your balance by the time the promotional rate ends, you may be tempted to transfer your balance again. While it can be done, it may hurt your credit score. When you continue to open low-interest accounts while maintaining high debt levels, lenders see you as a risk, which makes it more difficult when you need to finance larger purchases, like a house or car.
Other Details to Keep in Mind
If you don't keep up with your payments, sending at least the minimum payment on time each month, you could see that promotional rate rise, negating any potential savings.
Ready to Get Started?
Save with a balance transfer on any Navy Federal credit card. Members can apply online!