Dear Credit Card Adviser, I'm considering doing a balance transfer on a credit card. If by the time the promo period (12 months) is over I still have an unpaid balance (not planning to add anymore to the balance with purchases between now and then,) will I be charged interest going forward on the amount left or the original amount that I transferred? -- Renee
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Dear Renee, Yes, on the amount left. Most likely no, on the original amount. Let me explain.
Retailer credit cards and other store financing are the ones that often impose retroactive interest on an entire balance after a promotional period expires. Say the store promises you won't pay interest for six months. If the half-year passes and you have paid off only half the debt, the store can charge interest for the entire amount you borrowed.
However, balance transfer credit cards typically charge the higher interest rate on just the leftover balances after the intro period is up, says Linda Sherry, director of national priorities at Consumer Action, a watchdog group specializing in credit cards.
Many times, the new annual percentage rate, or APR, is higher than the rate you had on your existing credit card. Of course, the best practice is to commit to paying off your debt during the promotional period, so you don't have remaining debt hanging over you.
There are also other considerations besides leftover balances to think about before signing up for a balance transfer credit card.
First, do the math. Balance transfers aren't free. Issuers charge a fee, typically around 3% of the balance transfer -- sometimes with limits. That means if you end up paying interest on leftover credit card balances, you could ultimately pay more for the balance transfer than the interest you owed on your old credit card. Bankrate has a great calculator to help you figure out if the balance transfer is worth it.
Another factor is whether you will qualify for the low or zero percent interest rate. You need to have good credit to excellent credit, so be honest with yourself because you won't know your interest rate until you get the card. Same goes for your credit limit. You might not be able to transfer the entire balance to one card, so you could end up with two credit cards with balances. That may be annoying come bill-paying time, but the good news is one balance is interest-free for a while, and the one accruing interest is smaller than it used to be.
I'm happy to hear that you don't plan to add any new charges. That's key to making a balance transfer work, especially since many balance transfer credit cards charge a higher purchase APR.
Why commit to a balance transfer to reduce your debt, only to add to it? That doesn't make sense.
I'd recommend keeping the existing credit card open and active if it's an old account, even if you transfer the entire balance. It will help to lengthen your overall credit history, one factor that boosts your credit score. Charge a small amount at least every three months so your issuer won't close the account due to inactivity. Most importantly, pay off the entire balance every month.
Good luck with the balance transfer.