Fifty-seven percent. That's the number of Americans with a credit card who carried a credit card balance at least once in the 12 months prior to the Federal Reserve's Report on the Economic Wellbeing of American Households in 2015 released in May 2016. Of that number, 51 percent reported that they carried a balance "some of the time" (21 percent) or "most or all of the time" (30 percent).
While credit cards can help you with cash flow during a crisis, an unchecked long-term balance can drain your savings and prevent you from achieving your financial goals.
Conventional wisdom might have it that if you do accumulate a heavy balance over multiple cards, you can simply consolidate all that debt neatly onto a single credit card with a zero percent introductory balance transfer offer and close your other cards. Say, for example, you owe $5,000 on one card and $3,000 on another; you could package both balances together and pay off that grand total of $8,000 interest-free over how ever long the new card's intro period lasts.
But hold on (and this is where the nuance of credit card debt comes into play). There are a number of factors to consider before you begin looking at balance transfer credit card offers and then closing your other cards. If you aren't careful, you could find yourself paying more than you were originally or, worse yet, damaging your credit.
What is a balance transfer?
Put simply, in the credit card world a balance transfer means that you move an existing balance from one credit card onto another credit card. Many credit card issuers offer introductory periods during which new cardholders can move a balance onto that new card and then pay no interest on the balance for a set period of time.
These introductory offers can be a great tool for buying yourself some time, interest free, to pay off a major purchase, unexpected or otherwise. Generally, however, these transfers aren't completely fee-free and could have drawbacks, so it's in your best interest to consider your options.
Factors to consider before applying for a credit card with a balance transfer offer
First, you're going to have to give your prospective issuer some level of confidence that you can in fact pay off your debt. In order to qualify for a new card with a balance transfer offer, you'll need to have decent credit, some available funds and be in good standing with regards to your financial status.
All of this means that it's critically important to continue making payments on your existing credit card while your research a possible new one. Missing payments is one of the fastest ways to trash your credit score.
Next, consider the fate of your credit utilization, which can get out of whack if you decide to consolidate your debt by moving all of your credit card debt to one card and closing your other existing credit cards. Doing so can be detrimental since FICO and other credit-scoring algorithms penalize you any time you take your credit card limit near its maximum and any time your credit utilization percentage gets to high.
For example, let's look at the example from above in which you have two credit cards, one with a $5,000 balance and the other with a $3,000 balance. Let's assume the $5,000-balance card has a $10,000 limit, while the $3,000-balance card has a $5,000 limit. Currently, you have $15,000 in available credit and you're using $8,000 or 53 percent of that available credit. Broken down further, you're using 50 percent of the available credit on one card and 60 percent on the other.
Now, if you open a new credit card with a $10,000 limit and transfer all $8,000 to that new card before closing your other two credit cards, you are suddenly using 80 percent of your available credit, which will be a red flag when it comes to your FICO score. You're overall credit utilization percentage won't be as high if you don't close your first two cards (a good thing for your credit) but you'll still have a single card with a balance at 80 percent of its limit (a bad thing for your credit).
If you have plans of taking out a mortgage for a house or buying a car (or any number of other reasons you might need a loan), you need that credit score to be as high as possible in order to get the best rates. Maxed out credit, even if you're paying on it regularly, will likely hurt your score.
Thirdly, and partly for the reason mentioned above, consider keeping your oldest credit card active even if you decide to move its balance to another card. Credit scoring algorithms give you credit for loyalty, so unless you're paying an absurd annual fee on your oldest card, try to keep it open.
Now that you know what NOT to do, let's look at what you can do.
Let's first talk about your goals. Specifically, are you hoping to achieve a long-term credit boost or a short-term cash savings? If you're looking to boost your credit score, your best road to follow is to continue making payments on time and to balance out your credit utilization.
But before doing anything else, ask your existing credit card issuers if they can restrict your high-APR credit cards from new charges. Note that this isn't the same as asking for them to reduce your credit limit, as that could actually hurt your credit (see above). This initial step means you aren't opening a new account that can ding your credit score; you're just reducing risk for your bank and enabling them to cut costs and you're reducing your own risk of spending more on those existing cards. Confirm that your lender will report your updated account as active to all three credit reporting bureaus before you sign the deal. (Many will.)
Now let's talk about the long-term credit boost goal. Instead of putting all your balance on a single, new credit card, consider trimming your existing balances by a third or half. Shop for a strong balance transfer credit card offer, but try to consolidate only to about 30 percent of your new card's available credit limit. Banks will view you as a liability if you let multiple accounts drift too far upward towards the max and FICO pays close attention to how well you manage debt as opposed to your overall financial situation. Remember to keep your old credit card open (unless you're paying an astronomical annual fee) since credit-scoring algorithms also reward you for length of credit history.
On the other hand, if your goal is short-term cash savings, you'll want to go ahead and shop for the balance transfer offer with the longest introductory period and the lowest "go-to" rate. Consolidate as much of your outstanding debt to the zero-APR card then pay down as much as you possibly can on any balances that remain on your leftover cards.
Here's the trick to making this "debt snowball" work. If you pay off an account, start applying the same amount you used to pay toward one of your other accounts. You'll keep your household budget the same, but you'll clear your debt much more quickly. You might suffer a slight blow to your score with this method, but you'll significantly reduce what you're paying in finance charges.
Handling large balances with a balance transfer credit card
We need to talk, now, about what to look for if you do decide a balance transfer credit card offer is the best option for you.
Make sure to find a balance transfer credit card that lets you consolidate an appropriate amount of your debt (if you can keep it under 30 percent of the card's credit limit, that's ideal) onto a zero percent introductory APR credit card. You'll need to consider how long you believe you'll need to pay off your debt as there are intro periods of anywhere from a couple of months to much longer with the Citi Simplicity® Card - No Late Fees Ever, for instance. (Citi is a Cardratings advertiser)
If you already have a good-to-excellent credit score, you should be able to find some solid deals from Chase, Capital One, Discover and other major issuers. In addition to the length of the intro offer, you'll want to look at the balance transfer fees charged by balance transfer credit cards. For example, Discover it® Cash Back offers a 0 percent introductory APR on balance transfers for 14 months but charges a 3 percent balance transfer fee, which means you may or may not save money by transferring a balance from another card. It depends on the interest rate of the old card and how long you anticipate needing to pay it off.
Understanding your long and short-term goals will go a long way in helping you decide how to go about using balance transfer credit cards. Regardless your situation, take the time to fully educate yourself as you move forward in tackling your debt and getting a better understanding of balance transfer credit cards. Use tools like credit card payoff calculators to estimate on how long it will take you to pay off your balance and then make the right decision of you and your financial situation. And hey, the more you know about balance transfer credit cards, the better.