Credit cards are great payment tools, and they can even help you with cash flow when you need it. However, if you're struggling with high credit card balances and monthly interest charges, you may wonder if a balance transfer card with a low or no-interest introductory rate might give you a chance get ahead.
Used wisely, balance transfer credit cards can be a smart move, but if you're not careful, they can do more harm than good.
Here's what you need to know about balance transfer cards, and how to make them work for you.
What is a balance transfer credit card?
A balance transfer credit card is a card that allows you to transfer existing debt balances to it, as opposed to credit cards that only let you make purchases on the card or take cash advances.
Many credit card issuers offer introductory periods during which new cardholders can move a balance to the new card and pay no or reduced interest on the balance for a set period of time, which is generally six to eighteen months. These introductory offers can be a great tool for buying yourself some time, interest free, to pay off a balance during the time the offer lasts.
How does transferring to a no or low interest balance transfer credit card benefit me?
The conventional wisdom regarding balance transfers is that you can consolidate your credit card debt onto a single credit card with a 0% introductory balance transfer offer, and close or stop using your other accounts. The ideal plan would then be to quickly pay off that balance before the introductory period ends and you have to start paying high interest rates again.
Say for example you owe $5,000 on one card and $3,000 on another. You could transfer both balances to a new balance transfer card and pay off that grand total of $8,000 interest free over the length of the new card's introductory period. Keep in mind though that after the introductory period, regular APR will apply and interest charges will kick in, so when taking this approach, you’ll want to be sure to pay off your balance in full before the intro period expires – or at least pay it down as much as possible.
Can I qualify for a balance transfer card?
Generally, balance transfer credit cards are offered to those who have good or excellent credit. In some cases, you may be able to get an offer on a balance transfer card without a good credit score, but the terms will likely not be as favorable and you might not qualify for a card with a 0% introductory APR offer.
You may be able to improve your credit history before you apply for a balance transfer card. For example, you might correct any errors on your credit history, or improve your credit utilization ratio. If your credit score still needs work, consider applying for a secured credit card or a credit card for fair credit and use that card to help rebuild your score.
Do balance transfers hurt your credit?
If you do a balance transfer right, it shouldn't significantly hurt your credit score. It might even help.
When you apply for a credit card, the credit check may cause a small, temporary dip in your score. Unless you are about to apply for a mortgage or other loan, and you have borderline good credit, you likely won’t even notice.
Despite this temporary dip, if you have several credit cards and you add one more, you may later find your credit score improves. This is because your credit utilization, that is, the amount of available credit that you have used, should decrease if you’re approved for a new card. When your new card is opened, you will have a higher credit limit than you previously did, which means that your overall credit utilization will decrease– which should cause your credit score to increase if you don't increase spending on that card. However, if you go on to max out your new card after the balance transfer, it will likely have a negative effect on your credit.
What is the best way to pay off a balance transfer?
Getting a balance transfer card is a great opportunity to pay off your debt if you come up with a solid plan on how to do it. Make sure to find a balance transfer credit card that lets you consolidate an appropriate amount of your debt onto a 0% introductory APR credit card. To avoid lowering your credit score, try to keep the amount you transfer under 30% of the new card's credit limit. You'll need to consider how long you think it'll take you to pay off your debt as introductory periods range from a couple of months to much longer, depending on the card you choose.
If you already have a good-to-excellent credit score, you should be able to find some solid deals from major card issuers. In addition to the length of the introductory offer, you'll want to look at any balance transfer fees that might be associated with the card. That quite common fee means you may or may not outweigh the money you could save by making a balance transfer. It depends on the interest rate of the old card and how long you need 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 of 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 how long it will take you to pay off your balance so you can make an informed decision. Also, to make sure you don't miss a payment, consider setting up automatic payments.
How to choose a balance transfer credit card
The best balance transfer credit card for you depends on your needs. Ask yourself the following questions before you select a card:
What cards can I qualify for?
You should always check your credit score before you apply for credit. That way, you can focus on credit card offers that are realistic for you.
How long is the introductory period?
Introductory periods on balance transfers and purchases vary by card. If you need as long as possible to pay off a transferred balance, check out the U.S. Bank Visa® Platinum Card . It offers introductory 0% APR on balance transfers for a whopping 20 billing cycles (then 14.49% - 24.49%* Variable APR - See Rates and Fees). If you're interested in an intro 0% APR period on both balance transfers and purchases, the Citi® Diamond Preferred® Card might be a good fit. It offers intro 0% APR on balance transfers for 21 months (from date of first transfer and made within the first four months) AND new purchases for 12 months from date of account opening (then, 13.74% - 23.74% Variable APR). Citi is a CardRatings advertiser.
How much are the balance transfer fees?
Most balance transfers will have a fee attached, often averaging from 3-5%. Sometimes these fees will be waived, but it’s pretty standard for balance transfers to come with a transfer fee. If you are transferring a $10,000 balance, that transfer fee could cost you $300 (for 3%) to $500 (5%), for example.
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 though, as long as its other attributes balance out the fee. Some balance transfer credit cards come with a welcome bonus for new cardholders, for example, which could easily offset the cost of a balance transfer fee.
In the long run, a balance transfer fee is usually a small price to pay compared to the amount of money you can save on interest charges. Check out our balance transfer calculator to determine whether the cost is worth it in your case.
Do you want a rewards credit card?
For example, if you only have a small balance to transfer, and therefore won't use up much of your credit utilization, it might be okay for you to continue using that card while working to pay off your transferred balance. If that's the case, you might want to consider a credit card that offers a 0% intro APR period, plus earns rewards on new purchases. The Citi® Double Cash Card is a great option to consider as it offers a generous 18-month intro 0% APR balance transfer period before regular 13.99% – 23.99% (Variable) APR applies, as well as up to 2% cash back earned on purchases. Earn 1% when you make a purchase, and then another 1% when you pay at least the minimum amount due on your bill each month, on time.
What's the APR after the introductory period?
This rate will vary by card, but it’s important to pay close attention to this detail as introductory time periods can pass quickly and then you must start paying the regular APR on any remaining credit card balances. If you plan to keep on using your card after the introductory period expires, and you expect you may need to carry a balance, consider choosing a card with a lower-than-average rate.
Balance transfer pitfalls to avoid
Balance transfers can help you improve your credit score, but only if you handle them wisely. To get the most from a balance transfer credit card, avoid these mistakes:
Not reading the fine print on card offers. If you only look at the APR, for example, you may not notice a steep balance transfer fee. "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 author and speaker 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."
Owing high balances after the introductory period ends. It's imperative that you pay off, or pay down as much as possible, your balances before the end of the introductory period. Otherwise, when you start paying the higher regular APR, you may be in worse shape than before. 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.
Missing payments. You must keep up with the payments to keep your introductory low-or-no-interest deal. Miss one payment, and your introductory 0% APR may be permanently revoked.
Continuing to use your old credit cards. After you transfer your balances to the new card, it's easy to be tempted by the available credit now available on your old card. If you accumulate debt on your old cards, however, you may end up in worse shape than before.
Making purchases on your card before your transfer balance is paid off. Doing so could impact your credit score by increasing your credit utilization rate. Try to focus on paying off your balance and taking advantage of the interest savings the transfer affords.
Expecting to earn a signup bonus when you open your account. Transfer balances don't count toward the spending threshold to earn any signup bonuses offered with your card.
Churning balance transfer cards. It might seem like you can just get one balance transfer card after another and keep taking advantage of introductory no-interest APRs. In reality, unfortunately, that's not going to work. Khalfani-Cox says, "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."
How to use balance transfer credit cards wisely
Don't be fooled into thinking a balance transfer card is your financial knight in shining armor. Just as with any credit card, cardholders need to exercise fiscal responsibility and financial due diligence in order to reap any benefit from a balance transfer card.
If you are not organized enough with your monthly budget or don't think you will be able to pay off the transferred amount within the low-interest time frame, this may not be the best option for you. The hundreds or thousands you were supposed to have saved on the first card could instead end up on the second card.
A balance transfer credit card can help you tackle debt if you do the math and follow through by eliminating debt instead of adding to it. It's important to understand all the fees and terms associated with each credit card before you make a change.
Always look at your complete financial picture when you make plans that help you reach your goals. If you shop carefully for a balance transfer card that best meets your needs, you always make at least the minimum payment, and you work on paying down your total credit balances, you can make balance transfer cards work for you.