With the economy bouncing all over the place, consumers have been bouncing their credit all over the place, too. Hoping to find some breathing room, people have turned to Buy Now Pay Later (BNPL) and balance transfers as options.
BNPL has been much derided by both financial experts and the Consumer Financial Protection Bureau (CFPB), but recently there’s been an increase in balance transfers, and one financial guru tells ConsumerAffairs that option is a double-edged sword.
“Balance transfers are both a good and bad thing,” Cyndie Martini, the CEO and Founder of Member Access Processing (MAP), said, laying most of her concerns at the feet of “credit card churning” that sucks people into the balance transfer vortex.
And churning is certainly attractive. It can give a consumer the impression that they can open a new credit card account and score some sort of benefits like zero-percent or low-interest balance. There might even be a bonus like airline credit cards often do, dangling the carrot of tens of thousands of miles that could be used for free travel.
The ramifications of balance transfers
Martini – in big, bold letters – says that before taking the balance transfer route, consumers need to consider what they’re getting into.
Don't overextend yourself, it's not free money. “Balance transfers come with certain costs and limitations. Generally, you'll have to pay a balance transfer fee - usually 3% or 5% of the total transfer,” she said. “Therefore, know that a credit transfer is not free money to extend paying off your open balance – it's simply discounted.”
Your credit score can be impacted. Really? Really. Martini said that unbeknownst to many people, their credit score is impacted based on the total limit of combined cards. As an example, she offered this narrative: “For example, if you have two cards with a $10,000 limit on each card, your credit score will be affected in the same way if you have four cards with $5K limits on each. The effects of a balance transfer may be hard to predict, but it's important to arm yourself with as much important information as possible before you transfer any open balances.”
Understand why you want to transfer your balance to a new card. Yes, that’s “why” and not “why not.” “Your credit card score will also be impacted each time you sign up for a new card to transfer your balance onto because the credit card company will have to run a credit check on the account when you sign up,” Martini said. But, if having simply a “good” credit score rather than a "Holy Grail" perfect credit score is good enough, then a transfer balance may be a worthwhile consideration.
Plan for when you run out of free interest. Let’s say you have a 6-month interest-free offer when you transfer your limit to your new card, but you still have $10K in debt. “Then it's better to pay off the debt balance rather than continuing to transfer your open balance to new cards,” she recommended.
In its review of balance transfers, the CFPB also offered its insights on what happens when the "free interest" dries up. If anyone uses the same new credit card to make new purchases, they need to understand that they won’t get a grace period for those purchases and will have to pay interest until they pay the entire balance in full, including the transferred balance. Worse yet, if you’re more than 60 days late on a payment, the credit card company can increase your interest rate on all balances, including the transferred balance.
Pay your balance within your interest period. If you don't pay your balance in full within this period, the credit card company may charge you for the 6-month free interest in total. Oops. Most people don’t want to take the time to read a credit card policy before they leap into one, but Martini said that the devil is in those details more times than not and it’s worth poring over all the ifs, ands or buts.
Do the math. Martini said that if you have a significant amount of credit card debt, the 3-5% balance transfer fee is absolutely worth paying when transferring your balance to a card that has a 0% intro APR offer, but only – and this is important – if they still need time to pay off the balance. However, she said that if you can pay off your balance immediately in full on your current card, that is ideal because you'll save on any new interest fees as well as a balance transfer fee.
If after considering all of these points you decide a balance transfer card makes financial sense, ConsumerAffairs has looked at some of the best.