So maybe a string of bad, unexpected occurrences happened. And you had to resort to using your credit card. Or perhaps you weren’t as prudent as you should’ve been with your spending (it happens, practice self-forgiveness and come up with a plan of attack), and ended up swiping the plastic more often than you would’ve liked. Fast forward to the present, and you have a less-than-ideal, sizable amount of credit card debt.
Shouldering more credit card debt than you can reasonably handle? If so, then transferring your balance from a high-interest credit card to one with a 0% APR intro period may have crossed your mind. And while the idea of enjoying zero interest on a credit card balance has obvious appeal, you’ll want to carefully gauge the pros and cons, and decide whether it’s right for you.
In this article, we’ll walk you through what you need to know about credit card balance transfers so you can make the best choice for your situation.
What Is a Credit Card Balance Transfer?
In a nutshell, a credit card balance transfer is pretty simple. It’s when you move the outstanding balance on one credit card to another with either a 0% or low interest rate. Doing so will save on the total interest. In turn, it’ll lower your monthly payments, and you’ll also pay less in finance charges.
One thing to note is that those intro rates oftentimes have an introductory period, which is normally anywhere from 9 to 18 months. After the intro period ends, the regular APR kicks in.
By obliterating the interest on your balance, it’ll give you a chance to pay it off without the interest piling up. “It’s a great opportunity for someone who has a lot of credit card debt,” explains Beverly Harzog, a credit card expert and author of The Debt Escape Plan. “Otherwise it’s like hitting a moving target, as you’ll be struggling to pay off your cards with a high interest rate.”
Sounds like a pretty sweet deal, right? But before you sign up for a credit card balance transfer, you’ll need to consider the following:
When Is A Balance Transfer a Good Idea?
First things first: You’ll need a good credit score to qualify for a credit card with a 0% or low-interest introductory rate. So if your credit is less-than-stellar, you might not get approval for the card you want. So that may null the possibility.
If your credit is strong enough to get approved for credit card balance transfer, here’s how to decide whether a credit card balance transfer is the right choice for you:
If the transfer fee still makes it a financially wise choice. There may also be a fee tacked on to a credit card balance transfer, and is usually anywhere from 3% to 5%. This is folded in to your new APR. In other words, if you have a 0% intro rate, you’ll still have a 3% transfer fee that’s added to your outstanding balance. So if your outstanding balance is $1,000, the total amount you owe will be $1,030 with the transfer fee.
But even if you don’t qualify for a 0% intro period, it might still be beneficial to do a credit card balance transfer. For instance, let’s say you’ve racked up $20,000 in credit card debt and your APR is 20 percent. If you can get a credit card with a 10 percent, even with a 3% transfer fee, that’ll help you lob off some of the interest rate. That bit of savings could make a big difference.
If you’re using it to pay off past purchases. You’ll also want to make sure you are transferring the balance with the sole intention of paying off existing debt, explains Harzog. “The biggest mistake people make is making new purchases on the card,” says Harzog. “Remember: It’s not a free pass. It’s a card to get out of debt with, not for future purchases.” So divide the amount of credit card debt you owe by the number of months, roll up your sleeves, and get that balance down to zero.
If you can pay off the balance before the introductory rate ends. If you reasonably pay off the balance before your intro rate ends and the regular APR kicks in, then a credit card balance transfer may be worth your while. Otherwise, it’ll void your original intent, which was to save on the interest. And depending on how high the regular APR is and how long it’ll take you to pay off the balance, it could potentially cost you more.
What You Should Know Before Deciding On a Credit Card Balance Transfer
Look over the fees. You’ll also want to check and see what all the fees are, including foreign transaction fees, late fees, and cash advance fees. And while many cards don’t have annual fees, do your due diligence and comb through the fine print to make sure.
Read the fine print. As usual, don’t sign up for a card without looking carefully pouring over the fine print. What you don’t know could cost you. For instance, most cards require that you make the transfer within 60 days.
Choose carefully. If you plan on keeping the card after your intro APR rate closes, when shopping for a card, look closely at the terms and conditions, as well as the perks. What are the fees and standard APR? You’ll also want to make sure it’s a good fit for your needs. “Think about your lifestyle, and make sure it’s a good fit for you beyond the intro rate,” says Harzog.
It will hurt your credit score. A common question is whether a credit card balance transfer could hurt your credit score. While applying for or opening a new card requires a hard inquiry on your credit, it usually bumps down your credit score a few points. That being said, if such a move could help you save on interest or pay off debt quicker, don’t let that deter you.
“This is a chance to get out of debt, so focus on that,” says Harzog. “Your first job is to get out of debt. Your second job is focus on your credit score, because it will improve as you make progress.”
Figure out if you want to keep the card afterward. So once your intro rate period ends, the best thing to do is to keep it open, points out Harzog. That’s because if you have a high credit limit, keeping that card open keep your your credit utilization ratio, which is a good thing. (FYI: the credit utilization ratio is the percentage of your total combined debt against your combined credit card limit.)
As your credit utilization ratio makes up 30% of your credit score, so it’s not a small thing to overlook. Depending what your outstanding balance is on all your cards, and your total credit limit on your cards combined, closing your card may bump up your credit utilization ratio.
For instance, if you had a $30,000 limit on all your credit cards with $6,000 balance, your credit utilization ratio is 20%. (It’s generally recommended to keep this ratio to 30% or less.) But if your card with the zero balance transfer makes up $18,000 of your total credit limit, closing it will increase your credit utilization ratio to 50%. Yikes. If that’s the case, you’ll probably want to keep the card open.
What if you just want to use purely for credit card for the balance transfer? Consider asking for credit limit increases on your other cards, or look for a new card to boost your limit, suggests Harzog.
Yes, you can do repeat transfers, but to a point. Sure, you can do move your debt around and do repeat transfers, but you can’t do it forever, notes Harzog. Plus, there are some factors to consider that make it not the best idea.
Note that each time you move your credit card balance to a new card, which requires a hard pull on your card. In turn, it’ll negatively impact your credit score. And if you do it enough times, lenders may notice and flag it as a cause for concern.
Plus, you may run the chance of not getting approved for your next credit card balance transfer, which could leave you with more debt and a higher interest rate than you can comfortably manage.
Asking the right questions when deciding on a credit card balance transfer could help you figure out if it’s a solid move for your finances.