Balance Transfer Cards: Do They Work, and Do You Need One?
Balance transfer, balance shmansfer.
It sounds about as exciting as that pile of dirty clothes on the floor you’ve strategically been avoiding.
You’d free up so much extra space and stop tripping over them if you’d just move the clothes to the hamper.
The same logic applies to transferring your credit card debt.
Each pile of dirty clothes represents a credit card with a balance. By moving those clothes — aka debt — to new locations, you clear out dangerous piles and lower your chances of a risky situation.
While shifting debt isn’t as easy as moving a pile of clothes, it can save you money, help you get out of debt faster and simplify your financial life if you do it right.
But not all balance transfer credit cards are created equal, so there’s a lot to consider before making any moves.
What Is a Balance Transfer Credit Card?
They’re normal credit cards with a balance transfer perk.
A card with a balance transfer option allows you to move a balance — or multiple balances — from one credit card to another.
It doesn’t matter if you move balances from Visa to Discover or from a store credit card to a new Mastercard, but you usually can’t transfer balances between two cards issued by the same company, e.g., from a Chase Freedom card to a Chase Sapphire Preferred card.
Balance transfer credit cards generally come with lower introductory interest rates for a set amount of time. The rates then rise to a higher annual percentage rate, or APR, after the promotional period ends.
That’s when things can get tricky if you’re not prepared.
What to Consider Before Transferring a Balance
Fine print matters. Explore the fees, the duration of the offer and interest options before making the jump.
What to Look for in a Balance Transfer Card
|Fees||Minimum $5 to $10 or 3% to 5% of balance, whichever is higher|
|Interest||Look for 0% APR introductory offer and regular APR lower than current cards|
|Duration of Promotional APR||Usually 12-18 months, up to 21 months|
|Credit Score||Generally requires good or excellent credit|
|Credit Limits||Larger than current balance of cards you’ll be transferring|
You will incur a fee when you transfer a balance to another card. These fees vary based on the amount you transfer.
Beware of balance transfer offers for credit cards that have annual fees, which can run into the hundreds of dollars. Research competing offers to ensure the card’s benefits are worth the fee.
At a minimum, you’ll be charged a $5 to $10 fee. For higher balances, expect to pay 3% to 5% of the transfer balance.
Don’t be scared off by this fee. It’s minor compared with the amount you’ll save in most cases.
When using a balance transfer credit card, an introductory 0% APR is the best deal. You can get this by opening a new account or through an offer on an existing account.
If you transfer a balance to an existing account, make sure it has a better interest rate than the card you’re transferring from.
Promotional periods do expire, and you’ll be forced to pay the remaining balance at the full interest rate when they do.
So know what these interest rates will be ahead of time, in case you’re unable to pay off the whole balance during the promotional period.
Standard interest rates range from 14% to 26%.
Promotional periods typically range from 12 to 18 months (and up to 21 months if you’re lucky).
You may only need 12 months to pay off small balances at a lower interest rate, while higher balances might take more time to pay off.
Selecting a balance transfer card with a longer duration will give you the best chance of paying off your total balance.
Keep in mind that failing to make a payment voids most promotional offers, and you will be forced to pay the remaining balance at full interest.
If you have excellent or good credit, you have the best chance at scoring a 0% APR balance transfer credit card.
While it’s harder to get a balance transfer card with a low credit score, it’s not impossible.
Check if you’re pre-qualified for the balance transfer promotion prior to applying for a card to avoid the hit on your credit.
In that case, they generally have higher interest rates with shorter promotional periods, which might still be a better option than your current situation.
You can’t transfer $3,000 onto a card with a $2,000 credit limit. Verify the card you’re considering has a credit limit that supports your transfer balance.
Why Use a Balance Transfer Credit Card?
If you’re paying off a credit card balance at full interest, you might want to catch a ride on the balance transfer route.
But transfer credit card balances with intention. Be sure there’s a gain for you.
You’ve probably received countless promotional balance transfer credit card offers in the mail or by email. They boast 0% APR for 12 months (or something similar).
They work like this: If you have a $1,500 credit card balance with a 15.99% APR, you’re being charged 15.99% interest on your average daily balance every year — and that’s on top of the minimum payment. Which means you’re getting nowhere fast.
If you transferred that $1,500 balance to a card offering 0% APR for 12 months, then you avoid paying any interest on your balance for 12 months.
That means if you make a $125 payment every month for 12 months, you can pay off the entire balance before the promotional period ends.
If the balance is fully paid off before the 12-month offer expires, you can save hundreds of dollars in finance charges you’d otherwise pay on a high-interest credit card.
Once upon a time, I was paying off five credit card balances at once. I tried to remember the due dates. I even put them in my calendar and worked my budget around them. Still, I never seemed to make any headway.
I simplified my financial struggles by transferring all five balances onto two new promotional balance transfer credit cards.
The best offer I found was the Chase Freedom Unlimited card. Its introductory 0% APR for 15 months with a 5% transaction fee enabled me to transfer $800 from one account and $500 from another for $65.
I paid off the balance in 13 months without any additional finance charges.
Consolidating my balances down to two cards allowed me to get out from under those high-interest credit cards and actually make big dents in my debt.
I dubbed it the “balance transfer dance.”
Balance Transfer Rewards
Finding the card with the best transfer offer should be your first priority, but if you’re thinking about the long game — you know, when you pay off your card every month to make rewards worth it — you should check out which cards offer the best rewards.
Perks like cash back, points and airline miles allow you to enjoy extra benefits of a card, again, so long as you’re paying off a balance every month. Otherwise, any rewards you earn will be negated by the interest you’re paying on the credit card.
The average reward point is worth just over a cent, so 10,000 points is the equivalent of $100 to $150. You probably pay that much in interest every month if you carry a balance of $1,000.
And beware how much chasing those rewards could end up costing you, especially if you’re using the card as an opportunity to pay down debt rather than accumulate more.
Do Balance Transfers Affect Credit Scores?
Your FICO credit score is determined by five key factors: payment history, credit utilization, age of credit, types of credit and number of inquiries.
The best balance transfer credit card offers generally come from opening new accounts, which means you will receive a hard inquiry for each card you open.
Credit inquiries make up 10% of your credit score, so this will have minimal impact.
Opening multiple cards at once will increase the negative impact, but your credit score should rebound after a few months, so long as you use that time to pay off your debt.
Age of credit is 15% of your credit score. If you close an account or open a new one, these alter your age of credit average and could lower your score temporarily.
Credit utilization makes up a whopping 30% your credit score. This is how much credit you are using versus the total credit available on all of your accounts combined.
So, if you have a $1,000 limit credit card with a $500 balance, that means you are using 50% of your credit.
Opening a new account and transferring a balance can increase your available credit and positively affect your credit score.
Are you feeling more confident about balance transfer credit cards? Good. Now go do your laundry.
Stephanie Bolling is a former staff writer at The Penny Hoarder.