A balance transfer can help you save money on interest charges. However, if you don’t plan your finances right, a new card can get you deeper into debt. Carrying out multiple balance transfers is usually a sign of poor debt management. You should ideally try to pay down your balances as quickly as possible, failing which you’ll end up paying a considerable sum in interest charges.
- When handled right, a balance transfer may lead to monetary savings.
- A balance transfer has the potential to affect your credit score.
- 0% APR offers on balance transfers usually last from six to 21 months.
What Are the Advantages and Disadvantages of a Balance Transfer?
Several people turn to credit card balance transfers with the aim of saving money. However, not everyone succeeds, and instances of balance transfers going wrong are fairly common. Before you decide to take the plunge, it’s important to determine if a balance transfer is a good idea in your case.
- Save money on interest: A number of credit cards come with 0% APR offers on balance transfers, and the introductory rate usually stays in place for six to 21 months. If you transfer a balance from a high-interest credit card to any such card and pay off the balance completely within the promo period, you would pay no interest. In another scenario, you might also save money by transferring a balance from a high-interest card to one with a lower APR. For example, if you have a significant balance on a card with an APR of 24.70%, you might benefit from transferring it to a card with a 14.30% APR.
- Consolidate credit card debt: You have the option of transferring balances from multiple cards to a single card, provided the total of the transferred balances remains below your available credit limit. If making payments toward multiple cards each month seems like a hassle, you may consider transferring their balances to a single card. This way, you’ll need to make just one credit card payment every month. However, it’s important that you look at the new card’s APR and balance transfer fees before moving forward.
- Get better features and perks: If your existing credit card offers little in terms of features or benefits and has a high APR, you may consider transferring its balance to a different card. A number of balance transfer cards give cardholders the ability to earn cash back/rewards, and these include some that charge no annual fees. If you’re a frequent traveler, you might benefit by transferring your balance to a travel credit card, provided you qualify for a competitive interest rate. Several no-annual-fee cards also offer benefits such as no foreign transaction fees, complimentary insurance coverage and extended warranty.
- Possible improvement in credit score: If your new balance transfer card adds to your overall available credit, it helps bring down your credit utilization ratio. This refers to the credit you’ve used compared to your total available credit and should ideally remain at 30% or lower. For example, if you have just one credit card with a credit limit of $10,000 and an outstanding balance of $5,000, your credit utilization ratio is 50%. If you transfer this balance to a new card that also has a credit limit of $10,000, your total credit limit increases to $20,000. Without adding any more debt, your credit utilization ratio drops to 25%. A low credit utilization ratio helps build your credit score.
- Balance transfer fees: If you’re transferring a balance to a card with a 0% APR offer, you will, in all likelihood, need to pay a balance transfer fee of 3% to 5%. That’s $15 to $25 for every $500 you transfer. This might also be the case with cards that charge low interest rates on balance transfers.
- Time-based offers: Every 0% APR offer on balance transfers lasts for a predetermined period, typically ranging from six to 21 months. Once this period ends, a card’s regular APR applies to any outstanding balance.
- Termination of offer and penalty APR: Making a late or a returned payment may lead to an early termination of the promotional interest rate. Any outstanding balance after this point starts accruing interest at the card’s regular APR. Your card provider might also apply a penalty APR on balances from purchases in such scenarios.
- Need good to excellent credit: Most credit cards with balance transfer offers require that applicants have good to excellent credit. This is also the case if you hope to qualify for a low regular APR. While balance transfer cards for people with fair credit are typically hard to come by, there are a few options. Examples include the Navy Federal Union Platinum Credit Card and Citi Double Cash Card.
- Building more debt: Getting a new credit card results in increasing the credit you have available. If you’re not careful with your spending, this may lead to building more debt than you can repay comfortably. If you think you might have trouble keeping your expenses in check, you may want to consider closing your old credit card account after your balance transfer. However, doing so may impact your credit score.
- Possible drop in credit score: A balance transfer might hurt your credit score in two ways. If the new card comes with a lower credit limit than your existing card, and if you close your existing card’s account after the transfer, you may expect your credit utilization ratio to rise. For example, if you have just one credit card with a $10,000 credit limit and an outstanding balance of $2,000, your credit utilization ratio is 20%. If you transfer this amount to a card with a credit limit of $5,000 and close your old credit card account, your credit utilization ratio would increase to 40%. In addition, getting a new card or canceling an old card may bring down the average age of your credit accounts.
What Are the Risks of Transferring Balances?
While the benefits of balance transfers might seem appealing, it’s important that you understand the potential risks at the very outset. For starters, you need to account for the balance transfer fees you need to pay. If you make no more than minimum monthly payments during a 0% APR offer’s promo period, you would not be able to bring down the total amount you owe by much. The outstanding balance at the end of the offer period would start accruing interest, which could be higher than that of your old card.
The risk of your card provider terminating a 0% APR balance transfer offer exists if you miss making even a single payment on time. Adding another card to your credit portfolio comes with the risk of increased spending. This might not work well if you wish to be debt-free but are indiscriminate with your spending. In addition, getting a new card and closing your old credit card account might affect your credit score adversely.
TAKE A CLOSER LOOK…
If you feel that a balance transfer is a good idea to deal with your particular situation after weighing its pros and cons, look for a card based on factors such as the duration of the promo period, regular APRs, annual fees and added benefits. We’ve narrowed down on the best of the lot by relying on our unique ranking methodology.
MONEYGEEK EXPERT TIP
If you miss a payment, your promotional interest rate may expire early. Set up automatic payment of the minimum amount due to avoid late fees and interest rate surprises. — Lee Huffman, credit card expert at BaldThoughts.com
Alternatives to Balance Transfers
Transferring one or more outstanding credit card balances to a new card is not the only effective way to deal with credit card debt. For instance, you may think about getting a debt consolidation loan if you qualify for a competitive interest rate. In cases that involve seemingly unmanageable debt, credit counseling might be the way to go.
- Personal loans: Often marketed as debt consolidation loans, these types of loans give you the ability to consolidate your credit card debt. Depending on factors such as your creditworthiness and income, you might qualify for a lower APR than that which applies to your credit card.
- Negotiate a payoff: If you have enough money, you might be able to negotiate a payoff with your credit card provider(s). In this case, you’ll need to pay a lump sum amount that’s lower than the actual amount you owe to clear your debt completely. Be aware that many lenders will issue you a Form 1099 for the forgiven debt. This may be considered taxable income and, if so, needs to be included in your tax returns.
- Counseling: If you think you cannot manage your credit card debt on your own, getting in touch with a nonprofit credit counseling organization might be in your best interest. In this scenario, you might benefit by going through the advice that the Federal Trade Commission offers about choosing a credit counselor and how to make debt management plans work for you.
Other Questions You May Have About Balance Transfer Cards
Understanding answers to other commonly asked questions about the pros and cons of transferring credit card balances will help you decide if you should take this path.
Is a balance transfer a good idea?
A balance transfer is a good idea when you have a clear payment strategy in place since that balance transfer should help you save on interest charges. This could be by using a card with a 0% APR offer on balance transfers or a card that comes with a lower APR than the card from which you wish to transfer a balance.
Should you open a new credit card to transfer a balance?
You may want to consider getting a new credit card to transfer a balance in order to take advantage of an introductory 0% APR offer. But this is usually only recommended if you plan to pay off the entire amount or bring it down significantly before the promotional period ends. Any outstanding balance after the promotion expires starts accruing interest. If you have a considerable balance on a high-interest credit card, you may also want to consider transferring it to a card with a lower APR (after accounting for any possible balance transfer fees).
Is it better to transfer credit card balances than to continue paying high interest charges?
If you have a sizable outstanding balance on a high-interest credit card that you don’t plan to pay off completely within the next few months, transferring its balance to a card with a lower APR or one that has a 0% APR offer might work better than continuing to pay high interest charges on your existing card.
Should I use a balance transfer offer?
You may want to consider using a balance transfer offer if you think you can pay off the transferred amount completely or bring it down significantly during the promotional period. This is because any outstanding balance after the promo period ends starts accruing interest at the card’s regular balance transfer APR. If you plan to make just minimum monthly payments, you won’t manage to bring the outstanding balance down by much. Besides, your starting balance with the new card will also include any applicable balance transfer fees.
Is it worth paying a balance transfer fee?
It might be worth paying a balance transfer fee if you’re certain of bringing the transferred balance down significantly or paying it off completely during a card’s 0% APR offer on balance transfers. If you plan to transfer a balance from a high-interest credit card to a low-interest card, you need to determine if the difference in their APRs exceeds the balance transfer fee. For example, if you need to pay a 3% balance transfer fee, the difference between the APRs of your old and new card should exceed this number, and the higher the difference, the better.
What’s the best balance transfer card to get with a 650 score on Equifax?
A credit score of 650 on Equifax is regarded as fair. Most balance transfer credit cards require good to excellent credit, although there are exceptions for people with fair credit. These include the Navy Federal Union Platinum Credit Card and Citi Double Cash Card.
Is it better to pay a 4% fee and zero interest or an interest rate of 6.99% with no fee on a $4,300 credit card balance transfer?
This depends on how long you take to pay off the balance. Assume that the 0% APR on the card stays in place for 12 billing cycles, during which you pay off the entire $4,300. In this case, you pay 4% of the transferred amount as fees, which is $172. If you use the card with the 6.99% APR and take 12 months to repay the entire amount, you’ll end up paying $139 as interest charges. The latter comes out the winner in this case because while the 4% fee applies to the entire transferred balance, the 6.99% APR applies to your average daily balance that will keep reducing with time.
On the other hand, assume that you pay only $100 per month toward the card with the 0% APR offer during the 12-month promo period. After the 12 months, you’d be left with an outstanding balance of $3,300 (assuming you paid no balance transfer fees). Going forward, if you continue making $100 payments, it will take 42 months to clear the debt completely, and you’ll pay around $830 in interest charges.
Making $100 payments toward a $4,300 balance on a card with a 6.99% APR will take 50 months to repay the debt completely, and you’ll pay around $630 in interest charges. Using the card with the 6.99% APR, in this case, will result in you paying off the debt four months sooner, and you’ll save around $200 in interest charges.
When paying off credit cards using balance transfers, is it better to pay them off before the introductory APR runs out or to use the avalanche effect and pay off other high-interest credit cards first?
Try to include your high-interest credit card debt in your balance transfer. If that’s not possible, look at the regular APR that will apply on any outstanding balance of your balance transfer once the introductory period ends. If it’s lower than the APR of your high-interest rate cards, you may rely on the debt avalanche method and pay them off first. If the regular APR of your balance transfer card is higher than that of your other high-interest rate cards, consider paying off the transferred balance first.
Now that you understand the pros and cons of balance transfers, determine if taking this path might work well for you. If you feel it might, then base your search for a suitable balance transfer card on factors such as duration of the 0% APR offer, annual fees, regular APRs and additional benefits.
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