Many times, a zero-interest balance transfer is financial lifeline that can help you escape a modest credit card debt. But for some, transferring a balance may actually make your debt situation worse. Here's how to know if you should apply for a credit card balance transfer or not.
If you're dealing with a high-APR credit card balance that's costing you $50, $75, or even more than $100 a month in interest, a zero-interest balance transfer could eliminate these finance charges for a year or longer -- saving you money and allowing to repay the debt faster.
Is a balance transfer right for you?
If you're in a good financial place (for example, you have a stable job, a good credit score and your credit card balances are modest, not maxed out), transferring a high-APR balance so you can save money and pay if off faster is smart.
If, however, most of your credit cards are maxed out or your credit score has suffered from making late payments, you'll be better off looking at other options. Here's why:
1. Balance transfers require good credit. You'll need a very good credit score to be approved for a balance transfer credit card. That excludes most people who have a lot of credit card debt or have recently made late payments.
2. If your problem is too big, a balance transfer may make it worse. While balance transfers provide temporary relief from high interest rates, sometimes they exacerbate the problem by giving you more credit that you'll end up using when money gets tight.
If it sounds like a balance transfer might not be right for you, read more about how to get out of debt on your own or consider applying for a personal loan to consolidate your debt.
If you do think a balance transfer might help, you can:
- Compare recommended balance transfer credit cards
- Use a balance transfer calculator to see how much you could save
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 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 toward paying down your debt. Ultimately, you could save hundreds of interest.
Of course, balance transfers don't always save you money. Depending on how much you owe, your current interest rate, and the rate of transferring the balance (the balance transfer fee), it may not be worth it.
Before you do a balance transfer
Before you transfer a balance, ask yourself the following questions to figure out if it's the right move for you.
1. 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?
2. What kind of credit do you have? Will you be approved for a balance transfer?
As we mentioned above, balance transfer cards require excellent credit - and sometimes, 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 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.
One notable exception is the BankAmericard Credit Card, which features an intro APR on balance transfers for 15 billing cycles and an $0 introductory balance transfer fee for transfers made during the first 60 days of account opening (3 percent after that).
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.
Intro APRs vs low fixed APRs
Most balance transfer credit cards offer new applicants a 0 percent APR for a certain number of months. Other cards do not offer an introductory 0 percent APR, but a lower APR that will not skyrocket after a number of months (regular APRs may still vary slightly based upon the Federal Reserve Prime Rate).
If you have a small balance that you can pay off within a year or up to 21 months, intro 0 percent APR 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 or two, keep in mind that the credit card's regular APR will kick in on your transferred balance after the introductory rate expires. If that APR is higher than what you're paying now, the balance transfer may not be 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 MasterCard is one such card -- it has a low variable regular interest rate on purchases and balance transfers that stays low 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.
You might be tempted to make new charges.
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 a recommended balance transfer credit cards.
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