I have been seeing a lot of people posting about transferring debt to credit cards to get a better rate. Â Â I even read articles telling students to transfer their school loans to a card.Â Some say it is a good idea, and some say donâ€™t do it.Â What is the right answer?Â Transferring debt to a credit card is a risky move, but it can be beneficial.Â If you are thinking about transferring your debt, make sure you are aware of all the facts.
The Risks and Fees
If your mail is anything like mine, you receive about 2 credit card offers daily.Â They offer cash for applying, rewards for using, and 0% introductory rates.Â These are all great offers, but itâ€™s important to understand the risks involved when using credit cards.Â These are:
Missed or Late Payment â€“ You will be charged a $30 fee, and your rate can be increased.Â I have talked with many clients that had interest rates in excess of 25%!
Balance Transfer Fee â€“ 3-5% of the amount being transferred.Â A transfer of $3,000 can rack up to a $150 fee.
Slip in Credit â€“ Card issuers regularly monitor your credit.Â A late payment on your other bills can be used as an excuse to hike up your interest rate.Â They can do this even though you never missed a payment on that credit card.
Easy Money â€“ A credit card can be a dangerous tool for those who are not responsible.Â It can be tempting to spend when thereâ€™s an available balance.
IsÂ it Ever Right?
Â So I showed you the risks.Â Youâ€™re probably thinking, OK Paul, you made your point.Â I wont transfer my balance.Â That isnâ€™t what Iâ€™m saying.Â Transferring balances to a 0% card can save a lot of money.Â As usual, I like to monetize whenever possible.Â Lets say you transfer $3000 for example, to a credit card with a 0% APR for 12 months, and pay off the balance within that 12 month timeframe.Â Lets also assume you were making a $300 monthly payment.Â Here is a little chart with different interest rates and the savings of transferring the loan.
|Interest Rate||Savings||Transfer Fee 3,4,5%||Total Savings|
|5%||$71||$90/120/150||$-19, -49, -79|
|12%||$176||$90/120/150||$86, 56, 26|
|18%||$275||$90/120/150||$185, 155, 125|
Â If you are thinking about transferring a balance, make sure you can remain fiscally responsible.Â If you donâ€™t, the transfer can very easily cost you money instead of saving it.Â I also would advise not transferring student loan balances to a credit card.Â It’s risky and you could end up owing more than when you started.