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

Banks advertise 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 are some safe handling instructions for credit card balance transfers.


Before you apply for a balance transfer credit card, get the facts.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 transfers are a way to borrow money cheaply. For those struggling with debt, 0 percent balance transfer offers are wolves in sheep’s clothing.

Yes, balance transfers provide temporary relief from crushing interest rates, but sometimes they exacerbate the problem by giving you even more credit which of course, can 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 when not to) and other pitfalls of balance transfer credit cards to watch out for.

How balance transfer credit cards work

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

Hopefully, it’s obvious that a balance transfer doesn’t actually 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 $100 a month towards that debt, only $17 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, Bob’s Bank thinks “I’d like to get that revenue some day.”

Here’s what happens:

  • Bob’s Bank mails you an offer of 0 percent APR on balance transfers for 12 months.
  • You apply and are approved for the Bob’s Bank balance transfer card.
  • You give Bob’s Bank your Acme Bank account number and balance.
  • Bob’s Bank pays off the Acme Bank credit card.
  • Bob’s Bank charges you a balance transfer fee: between 3 and 5 percent of the amount transferred.
  • You start paying your new Bob’s Bank credit card. The Acme Bank card is paid in full.

With the new card, you don’t pay any interest for a full year. Your $100 monthly payment goes straight towards paying down your debt. Ultimately, you could 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?

What kind of credit do you have? Will you be approved for a balance transfer?

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.

Before you apply for a balance transfer offer, ask yourself if you think you will qualify for the credit card.

  • Have you had a credit history for more than a year, two years, or five? (Longer is better.)
  • Have you ever been 30 days late on a payment? (Bad.)
  • Is your $5,500 balance less than 50 percent of your available credit, or are you almost maxed out? (Maxed out is bad.)

If you want to be thorough, check your credit report for free before you apply.

If your FICO score is above 720, you are probably good to go. A score from 660 to 720 is a big maybe, and anything under 660 means you might not qualify for an intro rate or a large enough credit line.

Is the balance transfer worth it?

Most credit cards charge a balance transfer fee of between 3 and 5 percent of the transferred balance. 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.

Use our balance transfer calculator to see how much you could save.

Would you benefit from a fixed-rate balance transfer card?

Most balance transfer credit cards offer new applicants a 0 percent APR for a certain number of months. If you have a small balance that you can pay off within a year or 18 months, these offers are the ideal way to eliminate paying further finance charges on your balance.

If, however, you cannot afford to pay off your entire balance in a year, keep in mind that the credit card’s regular APR will kick in on your transferred balance. If that APR is higher than what you’re paying now, the balance transfer isn’t such a great deal.

If you think you need more than a year to pay down your balance, consider a card with a low regular APR rather than a 0 percent rate for a short period of time. The Barclaycard Ring Credit Card is perfect for this — it has a low 8 percent regular interest rate and no balance transfer fee.

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.

The balance transfer will still go through, but the new card will pay off some of your old balance, just not all of it.

  • If this happens: 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.

Can you avoid making new charges after you transferred your balance?

Finally, you must ask yourself if you can avoid making new charges on the new credit card to which you transfer the balance. This is a big no-no, because the credit card will take your payments and apply them to your low-rate transferred balance before your new purchases, which will be at a higher regular rate (unless the card also features an intro rate on purchases).

Almost always, it’s best to transfer a balance to a card and then keep that card out of your wallet until the transferred balance is paid off.

After weighing the options, if you think a balance transfer is worth it, check out our master list of recommended balance transfer credit cards 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.