A balance transfer from one credit card to another can be an effective money-saving method to pay down expensive credit card debt. Say you've accumulated a large balance on a card with a high annual percentage rate (APR). A balance transfer to a card with a much lower interest rate, ideally 0% APR for a year or more, means that your payment will be going mainly or totally toward paying off principal instead of most of it going toward interest. In the long run, that can potentially save you significant amounts of money in the form of interest that you don't have to pay. But there are pitfalls you need to know about before you decide to use a balance transfer.
- A balance transfer of credit card debt to a new credit card that offers a promotional 0% APR can be a money-saving way of paying off debt.
- It is important to read the fine print on the credit card offer, so that you are aware of any fees or other downsides of the deal.
- Disadvantages can include balance transfer fees, limits on the amount that can be transferred, a short introductory period before a higher interest rate gets applied to any remaining balances, and potential loss of the grace period on new card purchases.
Is It Wise to Pay Off Debt With a Balance Transfer?
Many credit card companies offer products with very low or even 0% introductory rates on balance transfers if you have a good credit score. Reducing or eliminating interest on your debt will automatically allow you to come out ahead, right? Not necessarily. It’s important to read the fine print in the offering, in addition to thoroughly researching your options so that you know you're getting the best card possible.
A fee is usually charged to do the transfer, typically 3% of the balance, though special promotions may waive it (usually if balances are transferred in the first 60 days of account opening). Most cards also limit the size of the transfer by way of assigning a new credit line. Finally, the introductory period, as the name implies, doesn’t last forever. It usually runs between six and 18 months (though a few transfer offers extend to 21 months), after which the interest rate goes up—often way up. Still, if you are able to find a new credit card with a very low interest rate, a low or no balance transfer fee, a credit limit high enough to accommodate your previous balance, and an introductory period long enough to pay off that balance before the rate increases, then a balance transfer can be a good deal.
An Example of a Good Balance Transfer
Say you have a $3,000 balance on a credit card with a 15% interest rate. If you pay $250 per month, it would take 14 months to pay off the balance and $271 of interest. However, if you transferred that balance to a 0% interest card with a 3% transfer fee while making the same payments, it would take only 13 months to pay off (including the $90 transfer fee), saving you $181.
On average, a balance transfer takes about two weeks. During that time payments still have to be made to the card company that currently holds your balance before it transfers to the new card.
Before applying for a new card or initiating a balance transfer, dig into the company’s terms of service. Every credit card company is required to disclose its full rate plan. Somewhere in the documentation is the percentage you pay at each credit level for balance transfers and how long that introductory rate lasts. Remember that a single late or insufficient payment can invalidate the introductory rate, causing your interest payments to soar.
A single late or insufficient payment can cause you to lose your introductory interest rate on any transferred balances.
When in doubt, contact the issuing company for the card you want for a balance transfer. Know your FICO score before you call and be ready to discuss general information about any negative items in your credit report. With this information, the customer service representative can offer comprehensive information about the offers for your situation.
Finally, balance transfers are generally not a good way to avoid late payments or to try to improve your credit score. Always use them judiciously and strategically to get and stay out of credit debt.