A credit card balance transfer can be a great way to save money on higher interest rate debt, but you may have some basic questions: What is a balance transfer? What is a balance transfer fee? How do you know if a balance transfer is right for you? A little research can go a long way in giving you peace of mind regarding this tool of personal finance.
Consider these tips when evaluating a balance transfer credit card:
- How Balance Transfers Work
- What Are the Benefits of a Balance Transfer?
- When Should You Consider a Balance Transfer?
- Picking the Best Balance Transfer Offer
- Tackling Debt via Balance Transfer
A balance transfer is when you pay off the balances on existing credit cards or loans by transferring them to another credit card account. If you have a high balance on a store credit card with a 21 percent APR, you may be able to transfer that debt to a credit card with a lower rate during the introductory period, saving money on interest—and possibly helping pay debt faster.
Consider this example: You have a $3,000 balance on a credit card with an 18 percent APR. You would incur $300 in interest charges if you paid that off with 12 monthly payments of $275.
If you transfer that balance to a credit card that offers a 0 percent introductory APR for 12 months on balance transfers, the new card may charge a transfer fee, typically around 3 percent of the balance. Your new starting balance would then tally $3,090. By making the same monthly payment of $275 for 11 months with one final $65 payment in month 12, you’d save $210 in interest charges.
The numbers that go into a balance transfer calculation include:
- How much you want to transfer
- Your current card’s annual percentage rate (APR)
- Your new card’s introductory APR
- The term for balance transfers
- Your new card’s standard APR
- The balance transfer fee
The amount you can transfer will depend on the new card. You can transfer the existing balances from store credit cards, gas cards and others. When you are approved for the new card, you will still have balance limit and you can only transfer up to that amount.
When you respond to a balance transfer credit card offer, you’ll indicate who you want to pay, the account numbers, and how much you want to transfer. Once you’re approved for the balance transfer, the credit card company contacts your creditors or billers on your behalf and pays them the amount you indicated. It can take up to two weeks for this process.
If you have any payments due before that time, you’ll want to go ahead and make those payments by the due dates to avoid late fees.
Also, it’s important to know that balance transfers do not automatically close an account. If you want to close a credit card account after you transfer the balance from it, you need to contact the creditor to do so. But you may want to keep the card open, as closing cards has the potential to negatively impact your credit rating. And it’s ok to have an emergency card available, for example, as long as you don’t use a balance transfer to rack up more debt.
A low balance transfer APR can help you catch up on your existing debt. That’s because you can get a low promo or introductory APR to pay down that balance for a defined time frame, like 12 months. A low promo or introductory APR may also help cut the time it takes to reduce your debt.
When you pay high APRs, some of your payment goes to the interest rather than paying down the principal balance itself. Finally, instead of paying multiple creditors on multiple due dates, consolidating all of your balances onto one card with a low or 0 percent promo or introductory balance transfer APR means you only have to keep track of one payment a month — not multiple cards with multiple due dates. You might find a card where the intro APR also applies to regular purchases, an extra bonus.
Ultimately, thought, a balance transfer is a money-saving move, a chance to pay a balance off faster with more money applying to the principal (the balance) and less to interest charges.
It may be time to explore a balance transfer when you’ve piled up balances on multiple credit cards and it’s a struggle to manage the payments with multiple due dates. There’s a lot to keep track of in life and consolidating this part of your finances gives you a few less things to worry about.
Americans today lead busy lives, and it’s easy to overlook a credit card payment due date or two when you have several to make each month. Yet doing so repeatedly may impact your credit score. If you find yourself missing a payment or three, you might benefit from the consolidation a balance transfer can offer.
In addition to helping you manage your record-keeping and budgeting, a balance transfer may also help reduce stress and improve your mental well-being. More than half of Americans over age 18 say they lost sleep over at least one financial issue, according to a survey commissioned by Bankrate. A path to paying off debt faster while saving money and reducing bill-paying logistics could help you sleep better at night.
While cardholders who have a “good” or “excellent” credit score will likely have access to the most competitive balance transfer options, there are options even for those who don’t have excellent credit.
First, search creditor websites online and review credible personal finance websites for recommendations and reviews of different balance transfer offers.
Balance transfer credit card offers are sometimes available on existing credit card account(s) with promotional APRs, which also apply for a defined time period. Contact your credit card company for more details.
Once you find some options, compare the terms. For example, introductory periods for balance transfer offers can range, so you may find offers of six months or more than 12 months. Shop around for the offer that will suit you best. You can even calculate your potential savings with a balance transfer calculator to give yourself an idea of how much you’ll save.
If you can find an introductory 0 percent balance transfer credit card offer and a lower overall APR, this may also be a good opportunity. Also consider the overall benefits and rewards of the card, like cash back or miles, for instance, that could play into your decision.
Consider how much you can afford to pay to the card each month. Then, look at how that matches up with the promotional period the card is offering. If you still owe a lot on the new card after the promotional period ends, that could reduce any savings you may have gained by transferring the balance. You’d need to step up your payments or choose a card with a longer promotional offer.
It’s important to focus on how you can stay out of debt for the long run. Here’s some ideas:
- Curb Spending. You also don’t want to use a balance transfer credit card as a short-term fix. In other words, you don’t want to continue accumulating debt during an introductory period where you have an APR of 0 percent for a period of time, and then go right back to paying a higher rate with a bigger balance.
- Maximize the Introductory Period. Credit card users who are fortunate enough to receive these offers should seize the opportunity to pay off as much of their debt as possible before the promotional financing period expires. Those who fail to pay down their debt during the promotional financing period have missed a valuable opportunity. If you’re transferring a large balance and you’re not able to qualify for a card with a 0 percent intro APR offer, you’re basically adding to your debt in the short term.
- Don’t Chase. Also avoid “chasing” 0 percent balance transfer credit card offers — or bouncing balances from one card to another. Consider finding a great balance transfer offer and making a plan to pay down the debt once and for all.
- Keep Old Cards. Next, remember that transferring the balance doesn’t close the original card. And you many not want to shut down that card. Closing down old accounts can ding your credit score. For example, it could impact your utilization rate. Losing points off your score could make it more difficult to qualify for new credit in the future.
- Avoid Using the Old Cards. At the same time, you don’t want to make the mistake of racking up new debt on the old card. Doing so can erase any headway you may have made by transferring the balance in the first place.
- Pay On Time. Finally, it’s important to be disciplined about making payments to the new card on time every month. Late payments can wreak major havoc on your credit score and trigger a late fee. Even worse, some credit card companies will increase your APR if you pay late by 60 days or more. The new APR could be much higher than the promotional rate you started out with.
But don’t let potential pitfalls stop you from considering employing this valuable personal finance tool. With a little discipline and some research, you too could save a few hundred dollars a year, if not more, and improve your credit score.
Originally published February 17, 2015
Updated May 28, 2020.