Today's credit card industry is highly competitive, and as such, credit card companies are pulling out the stops in order to attract new customers.
One common way that credit card companies lure new customers is through credit card balance transfers, which can serve as a cost-saving way to consolidate debt.
Credit card balance transfers typically are used to entice new or current customers to move balances to the credit card in order to consolidate their outstanding debts.
Typically, credit card balance transfers come with very attractive low interest rates. Often, these low interest rates, however, are only good for a fixed period of time, after which they will increase. In most cases, the normal interest rate associated with balance transfers is higher than the interest rate tied to regular purchases.
When a cardholder transfers a balance to a credit card, he or she is charged a balance transfer fee, which can range from 3 percent to 5 percent of the transferred amount. Some cards offer special balance transfer deals that come with no balance transfer fee, but those deals are becoming rarer and rarer.
One of the primary benefits of credit card balance transfers is they enable individuals with multiple debts to consolidate their debts. Through debt consolidation, consumers often can pay off their debts more quickly than they would have if they had kept the separate debts. In addition, debt consolidation, if done right, can lead to lower interest payments over the lifetime of the debt.
Another possible benefit associated with credit card balance transfers is they could help increase your credit score in some cases. One of the many factors considered when your credit score is calculated is how much debt you currently have compared to your total available credit. Essentially, if your credit cards are maxed out, your credit score will take a hit.
Financial experts recommend keeping your outstanding debt below 30 percent of your total available credit. For example, if your total available credit is $10,000, you ideally want your outstanding debt to remain below $3,000. If you are able to open a new credit card, that new credit card will increase your total available credit, and thereby improve your total available credit-total outstanding debt ratio.
For example, if your total available credit was $10,000 and your outstanding debt was $3,200, your outstanding debt would comprise 32 percent of your total available credit. However, if you opened a new credit card with a $2,000 credit limit, your new total available credit would be $12,000 and your outstanding debt now would comprise 27 percent of your total outstanding debt.
While credit card balance transfers do seem very tempting, especially with their super-low introductory interest rates, they do have a few potential risks that should be considered.
First, opening new credit cards will ding your credit score. Opening one credit card will have only a minimal impact, but opening a new credit card every few months in order to move your debt from card to card will significantly lower your credit score over time.
Second, you do need to be cognizant of the balance transfer offer's fine print.
Some credit card balance transfer offers come with a maximum balance transfer fee - a great feature if you are looking to transfer a significant balance. However, this maximum fee typically relates to each transfer so if you are consolidating three different debts, you will likely be charged the maximum fee three times.
Additionally, some credit card companies treat the balance transfer fee as a purchase and not part of the debt that is transferred. This distinction is important because your credit card payments will go toward the balance with the lower interest rate before any other balances on the card. Therefore, your balance transfer fee will sit there, accruing interest at a higher interest rate, until you are able to pay off the transferred balance.