By Alexis Leondis / Bloomberg review
This is not the right time to increase your credit card balance.
Interest rates are rising. The average rate for a new card is over 20%, according to a review by LendingTree of about 200 card offers from banks and credit unions. In recent years, card rates for those carrying balances have hovered around 16%.
Across all income groups, more borrowers are worried about not being able to pay their credit card balance in full, according to a recent LendingTree survey. The drop in confidence comes as rising prices cause U.S. consumers to rely more on plastic, racking up credit card debt.
Card companies know you hate paying interest, so to convince you to get a new card, they will offer to let you transfer your balance from a competing card and pay no interest; for a while, at least. After about a year, interest kicks in at, say, 20% or more.
Still, the idea of earning 0% interest on your credit card balance, even for a short time, is very tempting. A NerdWallet study found that 11% of respondents had requested a balance transfer offer; and that was in April before the Federal Reserve started raising rates. Millennials were the demographic most likely to do so.
And while lenders are starting to get a little more cautious, they’re still comfortable extending balance transfer offers to people with average credit scores. A score of around 670 is all you need, says Ted Rossman, senior industry analyst at Bankrate.com. (The average credit score is around 710 these days.)
If you qualify, there are many reasons to proceed with caution. These offers won’t necessarily save you as much money. If you have a lot of credit card debt but excellent credit, you might be better off getting a personal loan. Or if you have relatively poor credit, working with a nonprofit credit counselor may give you more options.
First, there are fees. Transferring a balance to a new card usually means a charge of 3-5% of the total balance. So when calculating how much you’ll save in interest with the 0% offer, be sure to factor in what you’ll pay in that upfront fee. And if a card issuer says there’s no balance transfer fee, that probably means they won’t be as generous with the interest-free period.
Additionally, as interest rates rise and delinquencies rise, card issuers are likely to make their balance transfer offers less attractive, charging even higher fees for less time at 0%.
These balance transfer offers also come with limits. Often, you won’t know how much of your balance you can transfer until you complete the application and get approval. The average line of credit for new accounts, including balance transfer accounts, is around $9,000 for someone with excellent credit, $4,900 for very good credit, and $2,300 for credit ratings. subprime credit.
For those with balances, the average amount of debt is around $6,300. So prepare to be approved (usually under a proprietary formula that takes into account, among other things, your credit score and income) for a transfer that could be less than the amount you wanted to move. Rossman says that while card issuers can still be quite flexible when it comes to creditworthiness, they are much more demanding when it comes to credit limits.
Also be aware that you usually have a set window of time to complete the transfer and that you are generally prohibited from transferring to another card from the same issuer.
The biggest risk, however, is your best intentions. While you may resolve to diligently make payments each month to reduce the balance so you can pay it off before the 0% offer expires, it’s not always so easy. About half of Citigroup’s balance transfers eventually turn into revolving balances after the promotional period, the bank revealed in an earnings call last year.
Also, you won’t necessarily know exactly what the rate will be after 0% ends. The card issuer will give you a range, but this can fluctuate and it is your responsibility to find out.
So for the more disciplined among us who have great credit and a big credit balance that would be nice to pay off without interest, a balance transfer card may be worth the money. But a personal loan could be even better. These loans can help streamline debt into one fixed payment. You will pay more than 0% interest, of course, and there may be charges, but you will lock in a rate of, say 6%, for longer, say up to five years.
If your credit has suffered, a nonprofit credit counselor can work with you to negotiate fees and interest with your card company and create a repayment plan.
Besides, before considering a balance transfer card, why not just pick up the phone and speak with your current card issuer? The company may be motivated to work with you because they don’t want to lose your business to a competitor’s balance transfer offer.
According to LendingTree, 70% of those who asked to lower their interest rate in the past year got at least one reduction; and the average decrease was 7 percentage points. Those numbers have remained fairly consistent over the years, says Matt Schulz, chief credit analyst at LendingTree, and he doesn’t expect that to change anytime soon.
Alexis Leondis is a Bloomberg Opinion columnist covering personal finance.