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Credit Card Balance Transfers — Are They Worth It?
Yes
The ultimate goal of a credit card balance transfer is to save you money. It does this by moving a balance (the amount you owe) from a high interest credit card to a card with an introductory 0% interest rate (called a ‘balance transfer card’). In this scenario, you save money by not paying any more interest on the balance as you pay it back, meaning all of your monthly payments go toward the principle. This will pay off the debt faster and save you money in interest paid.
A credit card balance transfer can be a smart move if you have a large balance on a high interest credit card and can pay off the total within the 0% APR (annual percentage rate) introductory period. You might have a high interest card because you had a poor credit score in the past, but if you’ve improved that score, you may now qualify for a balance transfer card.
A balance transfer can also simplify your financial life if you’re able to move multiple debts onto one card—which means one payment date to remember, one check to write (or one auto-withdrawal to set up), and 0% interest spread across multiple loans—car, appliances, furniture, or other monthly installment loans.
Before you sign up for a balance transfer card, here’s what you should know.
Take note of transfer fees
With few exceptions, you will be charged a balance transfer fee when moving debt from one credit card to another. It’s charged as a percentage—from three to five percent—of the transferred balance. This fee is often added to your balance on the new card; however, it may not qualify for the 0% APR that applies to the rest of the balance transfer. The interest rate that gets applied to the fee can end up being more than what you were paying on your other credit card.
Those cards that don’t charge a fee often have a shorter introductory period—usually less than a year—which is the time during which you aren’t charged any interest. This isn’t a problem if you’re committed to paying off the balance on a shorter schedule.
The important lessons here are: check the fine print to determine if and how much of a transfer fee is charged, and if the 0% APR applies to that fee; do the math to make sure that with the fee it still makes sense and saves you money to make the transfer.
Promotional balance transfer APRs expire
We just mentioned this, but it bears repeating: the promotional, or “teaser,” rate that makes a transfer balance card so attractive doesn’t last forever. After between 6 and 18 months, it will end, and a new interest rate will be applied to any remaining balance. If you aren’t careful, this regular rate could be worse than your previous card’s APR.
You can also lose the promotional APR if you miss a payment, you pay less than your minimum payment, your check bounces, or you make a single new purchase on the card. In the first three cases, you could be charged a penalty APR (which is higher than the card’s regular rate) on top of any relevant late fees.
Adding new debt to old debt is risky
New purchases or charges made on your balance transfer card can complicate the debt-reduction plan that motivated the transfer in the first place. Often, new charges made on the card don’t qualify for the introductory APR or the introductory period is shortened. This creates a dual-interest-rate balance, which can be tricky to keep track of for budgeting. Another possibility is that a new purchase voids the 0% APR entirely on the card, so you could be charged interest on the entire balance (transfer + new purchases) unless you pay off your entire balance all at once.
Be careful to avoid the trap of making new purchases on the card just to earn whatever rewards the card promotes. Your goal should be getting rid of the debt, not spending more to earn rewards, no matter how enticing they sound!
The disadvantages of repeat transfers
If you don’t pay off your debt the first time you make a balance transfer and the introductory period runs out, it can be tempting to try the process again with a different low- or no-interest card. However, continuing this process ultimately hurts your credit score and keeps you in a cycle of debt.
So, a credit card balance transfer can work in your favor, but only if the fees aren’t too high, you won’t make new purchases on the card, and you can pay off the debt before the introductory period expires.