Credit card debt can be stressful and costly to pay off. If you owe money on your credit cards, you may be considering a balance transfer, where you move your balances onto a new card with a lower interest rate.
A balance transfer can be a smart financial move when you're carrying credit card debt, but it's important to understand how balance transfers work. Here are four myths about balance transfers you shouldn't buy into.
1. Anyone can qualify for a balance transfer
Each credit card issuer sets its own standards with regard to borrower eligibility. And many issuers will only approve balance transfers for applicants with decent credit already. If your credit score is too low, it could prevent you from qualifying for a balance transfer, or for a good offer on one. So it could pay to work on boosting your score before you apply.
2. Doing a balance transfer is always free
In some cases, you won't be charged fees to move your balances onto a new credit card. But some credit cards do charge an upfront balance transfer fee. You'll need to read the fine print before moving forward with a balance transfer offer.
3. Once you move your balances over, you should close your old credit cards
Doing a balance transfer means you'll no longer owe money on your old cards. But that doesn't mean you should get rid of them.
One big factor that goes into calculating your credit score is the length of your credit history. Closing credit cards you've had open for a long time could impact that part of your score in a negative way. So it could be a good idea to leave those accounts alone unless there's a compelling reason to close them (such as if you're being charged an annual fee for a given card).
4. A balance transfer will hurt your credit score
Whenever you apply for a new credit card, it counts as a hard inquiry on your credit report. A single hard inquiry will drag your score down by a handful of points. However, if a balance transfer saves you a lot of money on interest, then it's worth doing. And having your score drop by, say, six or seven points may not really have much of an impact.
Plus, a balance transfer could make it easier for you to pay off your existing credit card debt faster. And that could raise your score by lowering your credit utilization ratio, which measures how much of your available credit you're using at once. Also, getting a new credit card means adding to your total spending limit. And that should also help your credit utilization ratio improve.
If you're interested in doing a balance transfer, take some time to look at different offers to make sure you end up pursuing the most attractive one, financially speaking. And keep reading up on how balance transfers work so you know exactly what you're getting into.
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