Feeling frustrated and overwhelmed by credit-card debt? You aren’t alone. According to a Bankrate survey, 30% of American households have more credit-card debt than money in savings. With the average annual percentage rate (APR) for credit cards at more than 16%, consumers are squander big money paying interest.
Balance transfer credit cards are a common way for consumers to deal with credit card debt more efficiently.
What is a balance transfer card? It’s essentially transferring your credit card debt to another card with zero percent (or low) rates that allow you to whittle down the debt without paying interest during an introductory APR period. Every dollar goes toward reducing the balance — and not spinning your wheels with large interest — so you get out of debt more quickly.
Key point: This isn’t a way for you to use another card to buy more stuff. It’s about getting rid of the debt you already have.
Even with a balance transfer fee of 3%-5% on every balance transferred to the new card, it can still be an effective method of escaping from debt and also boosting your credit score.
The amount you transfer depends on the card issuer. Mostly, you’ll only be able to transfer an amount equal to the available balance of the new card, but the limits should be established once you are approved for the new account. Transfers generally aren’t allowed to another card from the same company or financial institution.
We know you have questions. How do balance transfer cards work? How do you do a balance transfer? Do balance transfers hurt your credit? Can I cancel a balance transfer? And, of course, should I do a balance transfer?
For answers, suggestions and ways to avoid typical mistakes when it comes to balance transfers, read on.
How Does a Balance Transfer Credit Card Work?
When you transfer your balance to a new credit card, that card’s issuer pays off your debt with the original lender, usually another credit-card company. That takes care of your original agreement. The payment obligation is then shifted to the new card’s issuer.
The original lender, by the way, can’t prevent the balance from being transferred. All it will see is a payment being made on your behalf. It’s all business. The original lender is satisfied with the payment. And the new lender gets your business.
You should request a balance transfer immediately or within a few months of applying for the new card. That’s when the reduced interest rates and fees kick in for balance transfers.
New card approval is a pretty seamless process, but the balance transfer itself usually takes two weeks to two months before it becomes effective.
You’re probably thinking, “Can I cancel a balance transfer?’’ Not really. You generally can’t cancel or reverse a balance transfer once the transaction is complete, although some companies might offer a brief grace period. Some card issuers will let you cancel if it hasn’t yet posted, but it’s always best to request cancellation quickly once you decide on that course. Cancellation is never guaranteed, so think carefully.
Should You Do a Balance Transfer?
Everyone’s scenario and financial priority could be different. But here are general areas where a balance transfer is justified:
1. Saving Money: This will always be Reason No. 1. By getting a lower credit card interest rate — and many balance transfer cards don’t require you to pay interest for six to 21 months — you’re probably going to save a significant amount of cash while avoiding a hefty interest rate. If you have debt with a high interest rate, look hard at a balance transfer card.
2. Consolidation: By boiling down several credit card bills to just one, your financial life just got a lot more manageable and understandable. It’s incredibly complicated to track multiple monthly payments and due dates that often result in late payment charges.
3. Disappearing Debt: Instead of paying that debt for the remainder of your life, avoiding interest gives you the opportunity to make a big dent in that obligation or perhaps get rid of it completely.
Do Balance Transfers Hurt Your Credit?
It’s complicated. A balance transfer doesn’t affect your credit standing directly because it isn’t recorded on credit reports. But it can lead to changes in your financial profile that will affect your credit score.
Credit Utilization: A balance transfer can alter your credit utilization ratio, which is 30% of the formula used to calculate your credit score. Obtaining a new card increases the overall credit limit you have for your cards. As long as you don’t use the new card for spending, your credit utilization – available credit divided by amount used – will go down and that is a good thing for your credit score. A lower credit utilization ratio is better. Experts say you should aim to use no more than 30% of your available credit.
Overspending: This boils down to discipline. Balance transfers are horrible for credit if you use them to enable bad spending habits. Before the Great Recession of 2008-09, many consumers bounced from one 0% credit card to another, making minimum payments, but still avoiding interest. When the credit crunch dried that up, consumers faced big balances and heavy finance charges. It led to defaults, missed payments and ruined credit. Bottom line: If you’re a careless spender, those habits will ultimately override the supposedly creative solutions.
New Credit: Every time you open a new credit card account, your credit score takes a slight dip because of a hard inquiry on your credit report. The drop lasts 3-6 months. Multiple applications for new credit in a short amount of time will set off the red flags. Credit scoring companies will wonder what financial emergency caused you to suddenly need more credit. This will not be good for your credit score if you have a major financial event, such as applying for a mortgage or car loan.
Credit History: Once the new account is opened, the average age of your credit accounts changes. And that influences the length of your credit history. Example: If you have two credit cards — one 10 years old and the other four — the average age of your accounts is seven. It drops to 4.67 years with a new card and that decrease could hurt your credit score.
Balance Transfer Drawbacks
Should I do a balance transfer? There are times when a balance transfer isn’t in your best financial interest. Here are a few examples:
Balance Transfer Fees: These are generally 3%-5% of your balance and they’re the cost to execute the transfer. Fees are inevitable. They might be worth it considering the long-term advantage of interest savings, but each situation is different. Sometimes, the status quo overrides having to pay these fees.
Expiration of Introductory Offers: The 0% introductory APR offer will eventually end. And if you haven’t managed to make that work for you in the short term by paying off the majority (or all) of your debt, you’re back to ground zero. Back to paying high interest rates.
Acquiring More Debt: With a 0% (or low) interest rate, new purchases could be incredibly tempting. If you don’t have a good payback plan and are prone to purchasing the newest, shiniest item, you could be putting yourself in an even more vulnerable position.
How to Choose the Best Balance Transfer Credit Card
Not all balance transfer credit cards are created equal. Similar to any consumer venture, you’ve got to shop for a bargain and look out for your best interests. If you are looking for the best method to pay off a high interest credit card. Strongly consider the following:
Understand How the 0% Intro APR Period Works
It’s pretty simple. You want the longest promotional period possible. Ten months is better than six months. Sixteen months is better than 10 months. And so on.
Get the best deal and know exactly when your card’s promotional APR ends so you can finish paying it off and avoid interest. Also, pay attention to your billing statement’s due date. You must make monthly payments on the balance that was transferred. If your payment is late, it could cancel the promotional 0% APR and you might owe a penalty. Ouch!
Another tip: Your balance transfer could be 0% APR, but any new purchases on the card could be subject to the card’s ongoing variable APR. Get that straight from the beginning.
Check the Balance Transfer Fee
Most balance transfer fees range from 3%-5%. What’s the big deal? Well, it adds $30 to $50 to every $1,000 you transfer. The point of this is to save money, right?
If interest savings during the 0% intro APR period outweighs the fee — and you like other aspects of the card — you’ve probably found your best deal.
Maybe you’d prefer a few extra months with no interest and that distinction would be worth another percentage point on the fee. Know your priorities. Research them carefully.
Take Note of Your Current Credit Card Issuer
You generally can’t transfer debt between cards from the same issuer, so you know which potential cards to immediately eliminate.
Here are some highly rated 0% APR balance transfer cards:
- Citi Double Cash Card (18 months, cash-back rewards, 3% balance transfer fee).
- Citi Diamond Preferred Card (18 months, 3% balance transfer fee).
- Citi Rewards Card (15 months, 3% balance transfer fee).
- Citi Simplicity Card (21 months, no late fees, 5% balance transfer fee).
- S. Bank Visa Platinum Card (20 billing cycles, 3% balance transfer fee).
- Citi Diamond Preferred Card (18 months for balance transfers and purchases, 3% balance transfer fee).
- Wells Fargo Platinum Card (18 months for balance transfers and purchases, 3% balance transfer fee).
- BankAmericard (18 billing cycles for balance transfers and purchases, 3% balance transfer fee).
- HSBC Gold Mastercard (18 months on balance transfers and purchases, late fee waiver, 4% balance transfer fee).
- SunTrust Prime Rewards Credit Card (3.25% for first 36 months on balance transfers, no balance transfer fee).
How to Do a Balance Transfer
So, you’ve identified the need and researched the subject. The final question: How do you do a balance transfer?
The request itself should only take a few minutes. But some preparation will help the process and define for you the best course of action. Here are some action steps:
Examine Your Debt
Take a close look at all your debts to see how much you actually owe. Make a list and include each interest rate or APR. When you transfer balances to the new card, start with the highest-interest debt first. By doing that, if your credit limit runs out before transferring all of the balances, you will have addressed the most costly debt.
Check Your Credit Score
This could determine the best balance transfer card for you. Most of the top cards are designed for consumers with good-to-excellent credit, but there are options for people with less-than-good credit as well. For example, there are cards with 10%-and-up APR on balance transfers, which is a far cry from 0%, but it’s still better than the 25% or higher interest on existing balances.
Begin the Balance Transfer Process
Once you’ve found the right card, you can begin the application process. Typical of credit-card application processes, you’ll be asked to provide basic personal and financial data, such as your name, address, Social Security number and income. The approval process is probably minutes away.
When you apply for a balance transfer card, you can indicate which balances you want to transfer to the card upon approval. You should enter the 16-digit number of the credit card(s) from which you plan to transfer the balance, as well as the money you’d like to transfer to your new card.
The balance transfer takes between a few weeks and two months to complete. You should keep making regular payments on all your existing credit cards until receiving confirmation that your balances have transferred in full and any final interest charges have been paid off.
Create a Debt Payoff Plan
Once you have a balance transfer credit card with a 0% introductory APR, you should develop a plan for that interest-free period. Examine your monthly bills, bank statements and pay stubs to create a simple, pen-and-paper budget. Consider signing up for a budgeting app.
Check out where your money is going and see if there are spending areas that can be cut, even temporarily. Decide how much money you can afford to put toward the balance transfer credit card every month. That’s the way to get out of debt one payment at a time.
It’s hard to get out of debt if you keep adding expenses. Consider pausing credit card use completely while you focus on your debt repayment plan. Once you are debt-free, you can break out the credit cards again.
How to Use a Zero Interest Balance Transfer Card
There are a few outside-the-box ways to make a 0% APR balance transfer card work to your advantage.
Pay Off Other Debts
Some banks let you transfer debt from student loans, car loans, home equity lines of credit and other purchases made on credit (such as furniture or appliances). Balance transfer checks (or access checks) work just like normal checks, but they draw funds from your new credit card account to pay off your other debt. That gives you multiple months to pay off the balance, interest-free.
The risk? If you don’t pay off the full balance during the 0% period, the interest will increase to a much higher rate, possibly higher than what you were paying on the original loan. You must use discretion. If your loan is almost paid off, transferring it to a 0% interest card could be a very savvy move. With no interest, all your spare cash can go toward the loan balance and debt could be erased before the introductory period ends.
Get Cash for Emergencies
You can write a check, drawing on your 0% interest card, deposit it in the bank and use that cash to pay the bills. Think of it like an interest-free loan. Once the emergency is over, you can pay back that money during the introductory period.
It’s not quite as good as an actual emergency fund. Essentially, you’re paying off bills with borrowed money and if you can’t pay it back during the introductory period, you’ll be facing heavy interest.
If you’re uncertain, you’re probably better off with a personal loan, which can be paid back over three to five years.
8 Mistakes to Avoid with a Balance Transfer Card
Balance transfers can be extremely helpful to your finances, even a catalyst to change your habits. But if you use them incorrectly, it might put you in a bigger predicament.
The banks already know that 40% of consumers will still have a balance past the introductory period, meaning greater interest rates will take hold. These numbers probably reflect human nature, but you need to do better.
You must be diligent about paying off your debt once it has been transferred. The money you’re saving in interest should be viewed as extra cash to put toward the debt, so it can be paid off more rapidly. Be smart and careful. You can make the zero-interest offer work to your advantage — and not benefit the credit-card company’s bottom line.
But you’ve got to avoid the following mistakes:
Mistake 1: Using the Balance Transfer Card for New Purchases
It’s tempting to take your shiny new card to the department store and start swiping away, especially if it comes with an introductory 0% APR on purchases, but remember to read the fine print.
Be aware that not all balance transfers come with 0% interest on new purchases. Be aware that there could be a different introductory period for balance transfers, even if there is 0% interest.
Be aware that you probably can’t help yourself. Many consumers fail to repay their balances by the end of their grace periods. In such a rush to fully capitalize on a no (or low) interest loan, there’s the danger of stacking purchase upon purchase on top of a loan with a limited payoff time.
Every awesome purchase — cha-ching! — might seem like a great deal. But put on the brakes. Every transaction on your balance transfer credit card is actually a step in the wrong direction.
Mistake 2: Failing to Clear the Balance by the End of the Promotional Period
Pay attention, folks.
After the promotional period ends — it could vary between six and 36 months — there’s a collision with reality. It’s a return to high-interest credit card payments. After the introductory period, the average rate for balance transfers is a whopping 19.33%. That’s the average rate. Your rate could actually be much higher.
If your spending is out of control — Mistake 1 — you have no idea how deep of a hole you could create by failing to clear your balance.
Let’s do the math.
Before applying for a balance transfer card, calculate the monthly payments necessary to clear your debt before the grace period ends.
Here are the hard numbers: If you have $6,000 in credit card debt, you’ll need a $334 monthly payment to clear your balance in 18 months. Get to $500 a month and you can clear the deck in 12 months. It would cost $1,000 month to erase the debt in six months.
And that’s only if you don’t use the card at any time — not once — for new purchases.
Let that sink in. It’s difficult for anyone to find an extra $1,000 a month for credit-card debt. But if your introductory period is just six months, that’s your only route to clearing the balance. Limiting your spending is imperative. But it’s also vital to find a balance transfer card that gives you a long enough, low-interest grace period to repay the debt in full.
Mistake 3: Missing the Transfer Deadline
Pay attention, folks: Part Two.
If you get a balance transfer card, there’s a deadline to transfer your debt. Usually, it’s within three months. If you miss that deadline, the 0% APR deal is off. Then what do you have? Another high-interest credit card in your wallet. So, get your paperwork in order and don’t dawdle.
Mistake 4: Forgetting About the Last Payment on Old Cards
Just because you’re moving toward a balance transfer, it doesn’t mean you should ignore your old cards. If you do, in fact, it could mean trouble.
While waiting for the balance transfer to take affect — remember, it might require a few weeks — your old cards could be creeping up on their due dates. You are risking getting slapped with late fees.
And that could mean your new balance (late fees included) could exceed your balance transfer credit card limit. So, you’ll need to ratchet down the debt before attempting another transfer and that might lead to missing the transfer deadline (Mistake 3).
Even if you transfer the debt without exceeding your limit, missing payments will still cost you money. And it will send your credit score downward.
Mistake 5: Not Realizing There Is Still a Minimum Payment
Don’t forget your fundamentals. Balance transfer cards are not a vacation from debt. They are a potential lifeline. But you must make the minimum payment (preferably more than that, of course).
Balance transfer cards generally require a minimum payment of 1% or 2% of the balance. Miss a payment? The promotional offer probably gets pulled off the table. Remember, once that deal goes away, the average interest rate is 19.33%, a place you don’t want to be.
Bottom line: You’ve got to make the minimum payment — at least. But try to be better that that. Pay as much as you possibly can. Remember your fundamentals, why you are doing this in the first place — to erase your debt.
Mistake 6: Overpaying on Transfer Fees
You’d like the 0% transfer fee. Who wouldn’t? But remember, not all balance transfer cards are created equal.
Let’s say you transfer $10,000 at a 4% balance transfer fee. Your new total becomes $10,400. That extra $400 of debt you just inherited? On a 0% card, that’s money you could be spending on clearing the balance.
So, when does it become too much? Even a card between 3% and 5% is still probably worth it, just to avoid the normally crippling 20%-30% interest you might be paying. But do your research. Don’t jump at the first deal.
There are always deadlines. There’s a window to complete balance transfers before the promotion expires. And there’s a window that allows you to keep most 0% transfer fee deals (usually 30 days). So be prompt. Mark your calendar. Set an alarm clock. Whatever. Just get it done.
Mistake 7: Taking Out Cash Advances
As part of a balance transfer card, you will inevitably be offered cash advances. Be wary. Make sure you are really signing up for a balance transfer because cash advances require extra-high interest and fees. Sometimes, credit-card companies send access checks for both types of transactions — even side by side in the same envelope. If you use an access check to make the balance transfer, double check to make certain it’s the correct transaction.
As tempting as it might be to utilize a cash advance for emergencies, remember that it is borrowed money and the long-term implications could be disastrous.
Mistake 8: Closing Old Credit Card Accounts
If you use your balance transfer card in a judicious way, imagine the feeling of liberation when you grab all of your old credit cards, cut them in half with a pair of scissors and put them in the recycling bin.
Great feeling, right? Wrong! Big mistake.
It’s just not a good financial practice. Remember that credit history makes up 15% of your credit score. The longer you have a credit card (or any open account), the better it is for your credit score.
Don’t close those old accounts. Here’s the trick: Just don’t use the cards anymore now that you’ve acquired a new-found financial discipline.
Balance transfer credit cards can help you alleviate high interest debt. But if you lose focus and financial discipline, one mistake could mean losing the advantage and missing all the savings.
A balance transfer itself doesn’t make the debt go away. It simply makes it become your top priority. To get the most out of your balance transfer, you must have a plan to eliminate your debt before the promotional offer ends. Does your offer last six months? Then pay off the debt in six months (or less), so you can avoid a return to exorbitant interest.
This isn’t about a stopgap solution. It’s about changing the way you handle finances. This is where credit counseling from InCharge Debt Solutions can help. Regardless of whether your plan covers six months or 36 months, a nonprofit credit counselor such as InCharge can help you create a budget, then find ways to allocate the funds needed to pay off your debt in time.
The best part? The credit counseling service is free. Use it — and use it to your advantage.