Are you fretting over a high credit card balance that’s taking forever to knock down? If so, you might be able to create a little breathing room by stretching out payments and saving money on interest with a credit card balance transfer.
With a balance transfer, you pay off the balance on one credit card by transferring the high-interest balance to another balance transfer credit card that offers a lower or 0% introductory interest rate (APR). Then you owe the balance on the second card, typically with more favorable terms.
For a balance transfer to work in your favor, though, you’ll need to choose the best credit card for your situation and watch for pitfalls that potentially increase the amount of debt you’re hoping to kick to the curb.
When Is a Balance Transfer a Good Idea?
First things first: Don’t beat yourself up if you have credit card debt. You’re not the first person to go overboard with plastic.
For example, when I bought my house, I needed furniture, a lawnmower and a ton of other stuff. In a series of shopping sprees, I ran up balances of around $3,000 apiece on two major credit cards, each with a 17% APR. I was paying nearly $100 in combined monthly interest, so I signed up for a balance transfer offer with an introductory 0% APR for 18 months.
A year and a half later, I had a zero balance, and I’d saved hundreds of dollars in interest, although I paid around $180 in balance transfer fees. Still, I came out ahead.
If you’re looking to pay less in interest and get rid of a credit card balance faster, here are four things you should know about balance transfers.
Look beyond the introductory period
Balance transfer introductory APRs generally last anywhere from six months to 21 months. The card issuer must tell you how long you’ll have the introductory rate and the APR that kicks in when the introductory period ends, according to the federal Consumer Financial Protection Bureau.
“That rate is going to eventually expire, and a new, much higher rate will apply,” credit expert John Ulzheimer says.
His advice: “Read the terms of the card so you’ll know if the issuer plans to charge you interest retroactive to the day you opened the card if you don’t have it paid in full by the time the promo rate expires.”
Factor in the transfer fee
Transferring $5,000 to a new credit card with a 21-month 0% APR gives you nearly two years to pay off that balance without any of your payment going toward interest. However, credit card issuers generally charge a fee of $5 or higher or a fee of 3% to 5% for each transferred balance, according to credit card issuer Discover.
For example, if you transfer a $5,000 balance to a new card that charges a 3% balance transfer fee, you’ll pay a $150 fee, which is tacked onto the new card’s balance. When deciding whether a balance transfer is right for you, always factor in the transfer fee on each balance to make sure you’re not paying more in fees (especially on several balance transfers) than you’d have paid in interest with the previous card.
To get an idea of whether you can benefit from a balance transfer, enter transfer amounts and interest rates into an online balance transfer fee or credit card interest calculator.
Know the new card’s APR
The last thing you need is surprise interest charges on your monthly statement. With balance transfer offers, new purchases frequently come with a higher APR than the introductory rate on the transferred balance.
Any amount over the minimum payment must apply first toward the highest interest balances on the card, according to the Credit CARD Act of 2009, a federal law that protects credit cardholders. You can find payment allocation information in a credit card’s terms and conditions, but here’s how it typically works.
Let’s say you transfer $2,000 to a new card with an introductory 0% APR on transfers and a 18% APR on new purchases. Then you charge $500 in new purchases and have a minimum payment of $75 due on the first statement.
If you make a $200 payment, the $75 (minimum payment) of that amount generally goes to the transfer balance. But the other $125 is applied to higher-interest balances. That means it can take longer to reduce your transfer balance.
Some balance transfer cards also offer 0% on new purchases, but that introductory APR period might be shorter than the balance transfer APR, so read the terms and conditions carefully.
Paying late may cancel out a balance transfer offer
Most credit card issuers require you to pay by the statement due date and will cancel the balance transfer intro APR if you’re more than 60 days late, according to the Consumer Finance Protection Bureau. Late monthly payments can also affect your credit score, so avoid these at all times.
The Bottom Line
Now that you know how a balance transfer works to help you pay off credit card debt and save on interest, it’s time to get started comparing the best balance transfer offers to find the one that’s right for you.