MoneyUnder30.com
Simple. Honest. Personal finance.
MoneyUnder30.com

Before You Apply, What You Need to Know About Balance Transfer Credit Cards

Banks love to push balance transfer credit cards as a money-saving debt fix. Of course, we know better. Balance transfers can reduce your interest costs and help you pay down debt, but only when used responsibly. Here: some balance transfer credit card safe handling instructions.

Transferring a credit card balance can save money, but comes with risks.If you’re struggling with credit card debt, a balance transfer credit card can save you money on interest while you repay it.

Fortunately, I haven’t used balance transfer credit cards in a long time (because I haven’t carried credit card debt in a long time). But there was a time when I used balance transfers left and right – shuffling debt from one credit card to another in order to stave off the interest…and the inevitable crash with the a financial wall towards which I was rocketing.

For the financially-savvy, balance transfer offers are a way to borrow money cheaply. For others struggling with credit card debt, 0 percent balance transfer offers can be wolves in sheep’s clothing. Yes, balance transfers provide temporary relief from crushing interest rates, but sometimes they end up exacerbating the problem because they give you even more credit which can, of course, lead to more debt than you started with.

In an effort to consolidate balance transfer advice from around Money Under 30, here I’ll discuss how balance transfer credit cards work, when to transfer a balance, and what to watch out for.

Check out our new balance transfer calculator here

How Balance Transfer Credit Cards Work

A balance transfer is simply paying off one credit card with another.

Hopefully, it’s pretty obvious that a balance transfer doesn’t really help you pay down debt; it simply moves the debt from Card A to Card B.

So why bother?

Normally, most credit cards charge fairly high interest rates (12, 15, even 20 percent). If you carry a $5,000 balance on a card with a 20 percent interest rate, you could be paying up to $83 a month just towards interest! So if you pay $200 a month towards that debt, only $117 actually goes to pay down the principal…the rest goes to the bank.

But banks compete with one another. So if you’re paying Acme Bank $83 a month in interest, Best Bank thinks “I’d like to get that revenue some day.” Best Bank then mails you an offer for a new credit card that promises a 0 percent APR on balance transfers for 12 months.

Let’s say you go for. You apply for the credit card from Best Bank and (assuming you have excellent credit) get approved. You give Best Bank the account number and balance of your credit card with Acme Bank.

Best Bank pays off Acme Bank and charges you a fee of a few hundred dollars to process the transfer. But then you don’t pay any interest for a full year. Your $200 monthly payment goes straight towards paying down your debt. Ultimately, you save hundreds in interest.

Of course, balance transfers don’t always save you money. Depending on how much you owe, your current interest rate, and the cost of transferring the balance (the balance transfer fee), it may not be worth it.

Is a Balance Transfer Right For You?

Before you transfer a balance, ask yourself the following questions to figure out if it’s the right move for you.

Are you absolutely committed to getting out of credit card debt for good? Or is there a chance you’ll transfer the balance and then start using the old credit card again?

Will I be approved for the balance transfer card? Believe it or not, balance transfer cards require excellent credit – and that may not be enough. Banks also won’t extend new credit if you’re maxed out or very close to the limits on all of your credit cards. You’ll stand the best chance of getting approved for a new balance transfer credit card if your  credit score is 700 or above and you’re credit card debt is less than 50 percent of the combined credit limit on all of your credit cards. This is called your utilization ratio.

Unsure of your utilization ratio? Grab a free copy of your credit report from annualcreditreport.com. Each account on your credit report should show a balance and credit limit. Add up all your balances, then add up all your credit limits. Divide the total credit limit by the total balance to arrive at your utilization ratio. Free credit scoring tools like CreditKarma can also do this for you.

Will you save more in interest than the cost of the balance transfer fee? (Use our balance transfer calculator to find out.) Most credit cards charge between 3 and 5 percent of the transferred balance to do a transfer. Some cards cap this amount at a couple hundred dollars.

An example: If you’re repaying a debt at a 15 percent APR or higher over six months or more, a 0 percent balance transfer with a 5 percent fee starts to make sense. (The actual break even-point depends on your actual APR and your monthly payments, of course.)

If, however, you could repay the debt in less than six months, you might not actually save anything with the 0 percent balance transfer. You would, however, be tempted to let the debt hang around longer because you’re not paying interest…for now. You never know when you might face an emergency or lose your income and get stuck with an unpaid debt and an expiring introductory interest rate.

Important Things to Remember if You Do a Balance Transfer

You can avoid unpleasant surprises during the balance transfer process by preparing for the following scenarios.

You may not be able to transfer your entire balance. Although credit card applications will give you space to list multiple balances that you’d like to transfer, they don’t guarantee that they’ll transfer all of them. The bank will give you whatever credit limit they decide you should have, and it may be less than the balance you’d like to transfer.

If this happens, the balance transfer will still go through, but the new card will pay off some of your old balance, just not all of it. In this case you should make minimum payments on the new credit card while you pay off the old card’s balance as quickly as possible.

Read a card’s terms and conditions carefully to determine how long you have to transfer balances to take advantage of the intro rate. Some cards may require you do it at the time of application while others may give you several days or an entire billing period. In the latter case, you may want to apply for the card and then transfer balances once you know your credit limit.

You should avoid using the new balance transfer credit card for purchases. Although many cards that offer a 0 percent introductory rate on balance transfers also extend the no interest offer to purchases made within the introductory period, you have to read carefully. On some cards, the 0 percent offer may only apply to the transferred balance and those new purchases will result in finance charges.

Looking for a balance transfer card? Here are a few recommendations. You can also view all balance transfer credit cards here or try our balance transfer calculator.

Discover it®

Great For: Saving money on large balance transfers

Credit Needed: Excellent

Average Approved Score: 731*

Lowest Approved Score: 687*

  • Fair. No annual fee. No overlimit fee. No foreign transaction fee. Plus, pay up to midnight ET online or by phone on your due date without a fee. No late fee on your first late payment. And paying late won't raise your APR.*
  • Generous. 5% cash back at Home Improvement Stores, Furniture Stores and Bed Bath & Beyond® on up to $1,500 in purchases from April through June 2014.*
  • Human. 100% U.S.-based customer service available any time.
  • Safe. Because you're never responsible for unauthorized purchases with our $0 Fraud Liability Guarantee.
  • Plus, free FICO® Credit Score on your monthly statement to help you stay on top of your credit.*
  • 0% Intro APR* on balance transfers for 18 months. Then the variable purchase APR applies, currently 10.99% - 22.99%. A fee of 3% applies for each balance transferred.
  • 0% Intro APR* on purchases for 6 months. Then the variable purchase APR applies, currently 10.99% - 22.99%.
  • *Click "Apply" to see rates, rewards, and free FICO® Credit Score terms and other information.
Intro APR
Purchases
Intro Term
Purchases
Intro APR
Balance Transfers
Intro Term
Balance Transfers
Regular APR Annual Fee
0%6 Months 0%18 Months 10.99% – 22.99%* Variable $0

Citi Simplicity® Card

Great For: Balance transfers and direct access to service representatives.

Credit Needed: Excellent

Average Approved Score: 701*

Lowest Approved Score: 652*

  • 0% Intro APR on Balance Transfers and Purchases for 18 months. After that, the variable APR will be 12.99% - 21.99% based on your creditworthiness.
  • There is a balance transfer fee of either $5 or 3% of the amount of each transfer, whichever is greater.
  • No late fees - EVER
  • No penalty rate - EVER
  • No annual fee - EVER
  • Save time when you call with fast, personal help, 24 hours a day.
Intro APR
Purchases
Intro Term
Purchases
Intro APR
Balance Transfers
Intro Term
Balance Transfers
Regular APR Annual Fee
0%*18 Months* 0%*18 Months* 12.99% – 21.99%* Variable $0*

Capital One® Platinum Prestige Credit Card

Great For: Balance transfers and low introductory rates.

Credit Needed: Excellent

Average Approved Score: 687*

Lowest Approved Score: 634*

  • Transfer a balance for 0% intro APR until July 2015
  • Get 0% intro APR on all purchases until July 2015
  • Enjoy no annual fee
  • Get peace of mind with fraud coverage if your card is lost or stolen
  • Enjoy extended warranty protection on eligible items purchased with your card
  • Fast and easy access, 24/7
  • Rent a car using your card and get collision, damage, and loss insurance
  • Feel secure with 24-hour roadside assistance
Intro APR
Purchases
Intro Term
Purchases
Intro APR
Balance Transfers
Intro Term
Balance Transfers
Regular APR Annual Fee
0%until July 2015 0%until July 2015 10.9% – 18.9%* Variable $0

###

*Credit Karma users have received approvals with these TransUnion New Account credit scores. These approval metrics are only guidelines and approval is not guaranteed.

Check your credit score for FREE (for real -- no CC required). Learn how here.

About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. Along with the 3% being increased to 4% or 5%, I see most companies haven’t gotten rid of their maximum balance transfer fee. Citi used to have a $75 maximum fee, which when I used the offer was great. I transferred a large private student loan balance (~9K @ 8.8%) and saved a ton of money on interest over the 15 month term because of the capped fee. If I did the same today, I doubt it would be worth it. Great post, thanks.

    • Sorry, I meant have gotten rid of their maximum balance transfer fee.

      • David Weliver says:

        Great point, Adam. Those fee caps definitely made transferring large balances seem more attractive!

  2. I owe $12,000 in student loans, how long will it take me to pay this off and can i transfer fee to credit card? thomas economides new york brooklyn

  3. I got a credit card with 0% for 23 months. I was thinking about doing this but now I am not sure. I would not need to use all of it to pay off my overdraft seeing as it’s only £500 but I will see if it will pay off. I shall speak to the bank and see what they have to say about this option too. By the way is there a money under 30 UK? It would be a good little branch off idea?
    Matt.

  4. I get those offers all the time. Best one I ever got was from Capital One: 0%, 0$ transfer fee (usually the ones I get are 2% of balance transfered) for 12 -18 months. I stick the money in an “incentive Checking” account and MADE money on it (right now getting ~3%, monthly). Not lottery winnings, but every penny counts in my book.

Subscribe Now

  • Sign up for our 100% free email course, Money School



    We do not share your email and offer one-click unsubscribe-- always.

    Like Money Under 30 on Facebook