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In general, balance transfer credit cards can be a great help in managing your debt and allowing you to pay it down. But as with all things, there are always exceptions. Here are some of them.
Hold off on that balance transfer or do it ahead of time when you’re applying for a mortgage or another major loan. A balance transfer credit card entails the creation of new accounts, and new accounts result in a drop in your credit score. Although the drop in scores is minimal—a few points—a shortcoming is still there. Especially when applying for a mortgage, you will need every point you can get from your credit score. Your credit status may result in a decrease or increase in the interest rates you pay. The good news is that a drop in credit score is temporary. If you pay your dues on time and manage to reduce or eliminate your balance, your credit score will definitely improve. The only thing is that it will take a few months for your credit score to come back to its previous state. The problem here is timing.
It’s also a bad idea to use these cards as a means of building up your credit. Although you certainly can do this, it would not be a smart way to use a balance transfer. Balance transfer cards provide a way to pay off your debt with less interest and your main goal should be to eliminate your balance and save through them. You should not get lower interest just because you want additional credit at a lower rate.
Also make sure you can pay off the balance within the balance transfer offer time frame. Whether it is 6 months or 18 months, you must be sure that you can cover all your old balances by that time. This is because a balance transfer card offer is good only for a specified time period and if you pay your dues on time. The card company may increase your rates after the introductory period, so you should be aware of how much they will charge you. If you’re not careful, you could end up paying off your old and new credit balance under a higher interest rate than your old card.
If you’re also thinking you can keep making transfers after each introductory rate expires, think again. Some offers prevent you from transferring balance after the special rate expires. And even if you are allowed to do so, you cannot be sure that your next application for a balance transfer card will be approved. Furthermore, you cannot guarantee that the same low rates will be available in the future. You may end up paying off the balance at a higher interest rate than you expected.
These are just some of the scenarios where getting a balance transfer would be a bad financial move. You should always keep in mind that your objective is to eliminate debt and improve your credit score. You should use the transfer credit card to help you in that goal and not hinder it.
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