Money Rehab with Nicole Lapin - Balance Transfer: Yay or Nay?

Episode Date: March 21, 2022

You asked for it, and you got it! Nicole breaks down balance transfers and whether it’s a money move that would work for you. See omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. So I've been getting a lot of questions about my skincare routine.

Just kidding. But I have actually been getting a lot of questions about balance transfers lately. I covered this topic a little bit in episode 126, How to Consolidate Debt. But since a lot of you have been asking me about balance transfers specifically, I want to circle back and talk about it in more detail. So here's the question I'll be tackling today. Hey, Nicole. My name's Allie, and I'm a big fan of the show. I've been listening to Money Rehab, and I'm finally ready to get my debt monkey off my back. I've been hearing about balance transfers. Should I do it? Thank you so much for calling in about this, Allie. I am happy,

of course, to give you the 411 on balance transfers. So without further ado, let's get into it. The issue with credit card debt, as many of us know all too well, is that the interest rates are too high. And that starts a vicious cycle where you're busting your butt to pay off a debt that is snowballing into a bigger and bigger sum. At the most basic level, the goal of a balance transfer is to take all of your credit card debt and transfer it over into a new credit card with a much lower interest rate. Or better yet, a card with an introductory period of 0% interest, typically lasting between six months and two years. The strategy with a balance transfer is to pay off all of your debt during that period when you're not accumulating interest, because everything you put down goes straight to the principle, baby. No more snowballs. This is great news because not only does it mean your debt will

stop growing, but it also means that you'll be able to pay your debt off more quickly because the debt has stopped growing. If it sounds like a great option, it is. For some people. But balance transfers are not the best fit for everyone's debt. Before deciding to go with a balance transfer, I want you to think through these five things. Number one, do the math to see if you will spend more money in the long run. Unfortunately,

balance transfers do come with a fee, and that fee will be somewhere between three and five percent of the balance that you're transferring. If you're transferring your balance to a credit card with a zero percent interest rate, you'll probably still come out ahead even with the transfer fee. But if you're just transferring your balance to a credit card with a slightly lower interest rate compared to what you're paying now, it might not actually save you any money when you tack on the balance transfer fee. So actually crunch the numbers to confirm whether the balance transfer makes sense for your bottom line. Number two, your credit score will be dinged.

Remember, you're opening a new credit card, which will result in a hit to your credit score. Do you know if your credit score will be checked anytime soon? For example, are you applying for an apartment or a business loan? If so, now is probably not the right time to do anything that will lower your credit score. Number three, when you're looking at potential balance transfer cards, check the balance transfer cards limit. Depending on the card's limit, you may not be able to put your entire balance on that card. If that's the case, it may still be worth it to go through with the balance transfer, but you'll have to prioritize paying

off the balance that's still on the original card, the one with the high APR. Remember the golden rule? Pay off the higher interest accumulating debts first, always. Number four. If you can transfer your entire balance, consider keeping the original credit line open. You may be tempted to close the credit account that no longer has a balance. That credit line brought nothing but interest fees and stress. You probably can't wait to get rid of it, right? But remember, if you keep that credit line open, you'll have more available credit to your name, which will make it easier to keep your utilization score lower, and that helps your credit score. But if you do keep that credit line open, you cannot, and I repeat, you cannot use it. That credit line only helps you if you're not actually

using it. Confusing, I know. But remember, the whole point of a balance transfer is to help you pay off your debt for good, not to give you a longer leash to spend more. This brings me to my next point. Number five, make a repayment plan and stick to it. If you go with a balance transfer, you may breathe a sigh of relief when you see your debt isn't accumulating any more interest. But just because your debt has paused snowballing doesn't mean you can pause on making payments. A balance transfer will only be helpful if you stay diligent on making your payments while you're in that interest-free zone. A balance transfer isn't a move to kick the can down the road.

It should be a move to kick your debts butt once and for all. For today's tip, you can take straight to the bank. Typically, you need to have a good or excellent credit score. According to NerdWallet, you'll need at least $6.90 to get a balance transfer card. If you want to try for a balance transfer and need to get your credit score in better shape to do so, listen to Money Rehab episode 71, Insider Hats for a credit score glow up. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli.

Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.