What You Should Know About Switching Credit Cards

There are some people who receive low-interest balance transfer offers in the mail and immediately tear them up. These people realize that there are risks involved with switching balances from one credit card to another and they want to avoid getting in to financial trouble as a result of those risks. While it’s true that they may be saving themselves from a bad financial move, it’s also true that they could be causing themselves to lose out on a good opportunity to lower their monthly payments and to reduce the overall amount of interest that is paid on the outstanding balance. Instead of immediately tearing up those offers, these people should think carefully about the pros and cons of the balance transfer in relation to continuing to pay on the balances owed.

There are several major benefits to switching balances from one credit card to another. The main reason that people want to do this is because it allows them to lower their interest rate, often drastically. For example, you may have a credit card balance on a high-interest credit card which exceeds 25%. Switching over to a low-interest card which has an interest rate of under 5% is clearly going to make a huge difference in the amount of money that you’re paying. You will reap the benefits in the short-term as well as in the long term.

In the short-term, you will be able to significantly lower your monthly payments. The amount of money that you pay each month is calculated in part by the required interest payment. By reducing the amount of money that is owed on interest each month, you automatically lower your monthly payments when you switch credit cards. Additionally, this lower payment can make it easier for you to pay more down on the total outstanding balance. This means that you’ll pay the bills off more quickly and will ultimately be paying less in total because you’ll be paying interest on the loan for a shorter period of time.

However, there are fees associated with balance transfers that you will want to be aware of before you determine that switching credit cards is a good way to save money. The most important fee to pay attention to is the transaction fee for the balance transfer. Most credit cards charge approximately 3% of the loan rate as a one-time fee. If you’re already having trouble meeting your monthly payments, then you might not be in a position to pay this fee. One thing that you should look for is whether or not the balance transfer transaction fee has a cap. Many credit cards will say something like “3% fee with $75 maximum”. If you’re already paying hundreds of dollars in interest each month then you might benefit from paying the fee despite that it will cost a little bit of money out of pocket at the time of the transaction.

There are some other tricky things that you should know about when switching credit cards that can reduce the financial benefits of the transfer. For example, you should know that low-interest offers are almost always limited in duration. If you are not planning to be able to pay back the total loan amount within a short period of time (six months or twelve months are the most common low-interest rate offers) then you should try to find a long-term low-interest balance transfer rate. The actual percentage rate will be higher (around 7% instead of 0%) but if it lasts for the life of a long-term loan then you could save money in the end.