Anyone who has found themselves struggling to pay off the balance of a credit card with a steep interest rate is going to be tempted by the chance to relieve some of the pressure by lowering the interest rate, or going interest free, with a new balance-transfer credit card.
But is it really that simple? Not quite.
When it comes to finances, it rarely is. Credit card balance transfers can work in a consumer's favor, but there's a lot to consider before making the move.
Fees and fine print
"The big thing is to read all the fine print and be aware of all the rules and restrictions that govern any balance transfer you might consider," says Lynette Khalfani-Cox, "The Money Coach." "For instance, how big a credit line might you be able to obtain, what will the interest rate will be once that zero percent (or other discounted) rate expires, and what are the terms associated with this new card? All these aspects are important when you're considering applying for a new credit card and doing a balance-transfer offer."
From a practical standpoint, that fine print on the balance-transfer card can add up to some serious costs for you. The reason: Most balance-transfer cards, even if they come with zero-percent interest, will require a balance-transfer fee.
The first thing you should do is look for is whether the credit card balance transfer does have a fee attached, and just about of them will, says John Ulzheimer, credit expert for CreditSesame.com. "If so, how much is it? Most balance-transfer fees run from one to three percent."
You're more likely to see them at the higher end of the range, but credit experts say you don't want to pay more than that. If you are transferring a $10,000 balance, that transfer fee spread can cost you from $100 (for 1 percent) to $300 (3 percent), which will be tacked onto your existing balance. Also, note whether the fee is capped. Some credit card issuers will have a maximum of how much they charge in balance-transfer fees when you open a new credit card account. Others don't.
"A balance-transfer fee shouldn't automatic disqualify the card as an option, as long as its other attributes balance out the fee," Ulzheimer advises.
That comes to the next key issue. Just how long does the introductory rate last?
"Is it six months or is it 18 months, or somewhere in between? The primary purpose of balance-transfer cards is to find one that has a zero-percent grace period for a long enough period of time that you can pay the debt off," Ulzheimer says. "If six months isn't long enough then look for another option."
As Khalfani-Cox warned, the fine print can be filled with pitfalls, and Ulzheimer notes that one of the biggest is how interest is handled if you have not paid the entire balance by the time the grace period has ended.
"Many of the zero-interest balance transfer cards will charge you interest retroactive to the day you originally transferred the balance if it's not paid in full by the end of the zero-interest grace period, thus nullifying any benefit of ever opening the card," he says. "Balance-transfer cards also often offer their users zero interest on new purchases during the grace period, which could be an unavoidable temptation to some card user to get into more credit card debt that they cannot pay off by the end of the grace period."
In addition to finding the lowest fee possible with the longest and most generous grace period, also consider what the card is going to be like after the deal is over. "You should choose a card with no annual fee and no late fees," advises Andrew Schrage, co-owner of the personal finance website MoneyCrashers.com. "The only disadvantage is if you transfer a balance so large that you can't pay it off before interest charges start to kick in."
So, after all the analysis you've found a balance-transfer credit card that appears to fit the bill. But, still, is moving your balance from one card to another a good idea? That, in large part, comes down to a final bit of math.
"You should first evaluate the potential benefits, in terms of costs savings to you," Khalfani-Cox says. "If you know that it would take you, say two or three years to pay off your current credit card balance with its present interest rate, you can use an online calculator to see how much cash you'd save by doing a balance transfer."
If the transfer doesn't save you any money, the answer is simple: Don't do it.
How does this affect my credit?
Lastly, what happens to your credit score when you apply for a balance transfer?
"You should also think about your current credit rating," says Khalfani-Cox. "If you're maxed out already or if you've been 'churning' credit cards a lot, you may get declined. Under these circumstances, it can sometimes be better to wait a bit before applying for yet another credit card."
Inquiries to your credit history account for 10 percent of your credit score, she says, so it's worth thinking twice before applying for any new lines of credit, particularly if you've put in for several in the past year. There is no disadvantage, she says, to checking your own credit score to be sure you're in good shape to apply. Sites like WisePiggy.com (a sister site of CardRatings.com) offer free credit score reports so that you can know where you stand prior to applying for a balance transfer credit card offer.
Overall, though, just the act of applying for the balance-transfer card shouldn't be big concern. But the new account will affect your overall credit picture to a degree, Schrage says.
"The impact should be fairly minimal," Ulzheimer explains. "When you apply for the card, the card issuer will pull one of your three credit reports, which means one of your credit reports will have a new credit card inquiry. That's not the end of the world. When the account is opened it will show up on all three of your credit reports and lower the average age of your accounts. That's actually more problematic for your scores than the inquiry. Those are the two damaging possibilities.
There's a potential upside, too, he says.
"If you are able to eliminate multiple balances when you transfer them to the new card, your scores will likely increase," Ulzheimer says. "If you leave the unused cards open then your scores will likely improve as well because of the lower debt-to-limit ratio that you'll have after opening the new card. Just be sure not to use the cards that now have no balance or you'll find yourself in debt twice over and much lower credit scores."