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Balance Transfers

Balance Transfer Credit Cards

Balance transfer credit cards typically promise a low or 0% APR (annual percentage rate) for a limited period of time in exchange for transferring a balance from an existing credit card to a new one. If you have existing credit card debt, you might be hearing from credit card issuers with offers for a balance transfer.

Of course, as with any offer of credit, you'll need to meet the card issuer's qualification criteria. It's also common for balance transfer credit cards to charge an upfront fee for the service that can equal about 3% or more of the total amount you're transferring.

Balance transfer credit cards might be for you if:Balance transfer credit cards might NOT be for you if:
You currently have a balance on a credit card with a higher interest rateYou have a very high balance (you'll have to pay a transfer fee on that entire amount)
You are able to pay off your balance before any promotional rate ends (and rates increase)You don't carry a balance and you want to earn rewards
You aren't able to pay off the balance before an intro/promo rate ends (you'll usually pay a lot more in interest after that)

Pros and Cons of Balance Transfers

Whenever you make a decision about how to use a credit tool, it's important to understand how that tool works, and how using it could affect your overall credit standing. Balance transfers offer both benefits and potential pitfalls, and you'll need to carefully weigh whether the pros are worth risking the cons.

The pros of balance transfers include:

  • Transferring an existing credit card balance to a card with a lower APR can reduce the amount of interest you pay.
  • Paying less interest could make it easier to pay off your debts in full more quickly.
  • If you consolidate more than one balance onto a balance transfer card, having one monthly payment can be simpler than paying multiple credit cards- a benefit especially if you've struggled to remember to make on-time payments in the past.

The cons of balance transfers include:

  • A high transfer fee could outweigh the benefits you might get from a lowered APR.
  • If you fail to pay off the entire transfer amount by the end of the promotional period, your APR will reset to a higher rate—one that could potentially be higher than you were paying before making the transfer.
  • If you continue to use the paid-off card, you could accrue even more debt.

Understanding Balance Transfer Fees

Balance transfer fees vary depending on the credit card and agreement terms. Check to see what fees will be before applying or transferring any money to that new credit card. Usually you'll pay a 3-5% fee on the total amount you transfer and there is sometimes a minimum fee.

How To Make a Balance Transfer

Keep in mind that you can only transfer up to the credit limit on the new balance transfer credit card you get. Some additional things to note when completing a balance transfer:

  • When you do respond to a balance transfer credit card offer, you'll fill out additional information—including what amount you want to transfer—and will need to provide account information for the existing card(s) in order to transfer the balance to your new credit card.
  • Once the credit card issuer for your new credit card approves the balance transfer, that company contacts your creditor where the balance currently resides and pays them the amount you indicated on your application. It usually happens quickly, but can take 1-2 weeks for the payment to process.
  • Continue to make any credit card payments if you have a payment due before your balance transfer is scheduled to go through so you avoid any late payment fees.

Things to Consider about Balance Transfer Cards

In order to make a credit card balance transfer work in your favor, it's important to understand a few things about how they work.

1. Make Sure to Pay on Time

Most balance transfer credit cards will terminate the reduced APR if you pay late or miss a payment. Be sure to read the credit card agreement so you understand exactly how your new credit card works and what you have to do to preserve your promotional interest rate.

2. Try to Keep from Racking up Additional Debt

Most people open balance transfer credit cards in order to reduce their debt with a lower, more manageable interest rate. However, when you transfer a credit card balance, it's important to avoid adding more debt—either on the old card you've paid off or on the new card with a lower APR.

In some cases, the low APR may only apply to the transferred amount; new purchases can be charged at a higher, non-introductory interest rate. And, if balances are carried over, your payments could be applied only to the new charges, resulting in an increased chance of the transferred amounts remaining at the end of the promotional period, when your rates could jump higher.

3. Think Twice before Closing Your Credit Card

You may be tempted to close the paid-off credit card in order to eliminate the temptation to use it. However, closing a credit card account often negatively affects your credit scores—because it impacts your length of credit history and credit utilization ratio.

This ratio compares the total amount of credit you have available with the total amount you're using, and it's a factor in calculating credit scores. If you can resist the temptation to make purchases on the paid-off card, it's probably better for your credit utilization ratio to keep the card open.

Also, a balance transfer can influence credit scoring in another way. Every time you apply for credit—including a balance transfer application—it's noted on your credit report as a hard inquiry. Too many hard inquiries in a short period of time can negatively impact credit scores.

Applying for Balance Transfer Credit Cards

Depending on your credit scores and the information on your credit report, you may or may not qualify for the optimum balance transfer offer available. Before you apply for a balance transfer credit card, check your credit report and know your credit scores to see the type of information a credit card company will see when you apply for a new credit card.

Balance Transfer Card Alternatives

A balance transfer credit card can be an effective way to reduce debt and simplify payments, but it's not the only option available to you. Rather than open a new credit account, you could consider:

  • Debt consolidation: This involves bundling multiple unsecured debts like credit cards into a single, lower-interest loan. Having one payment per month can make it easier to keep up with payments and reduce the total amount of interest you pay.
  • Credit counseling: A reputable, not-for-profit credit counselor can help you create a plan for paying off debt, and help you learn good credit habits to avoid accumulating new debt.
  • Debt management plan: When you consult with a credit counselor, he or she may advise you to go on a debt management plan. The goal of the plan is to pay off unsecured debt; mortgages, auto loans and student debt won't be included. Also, you'll have to close all your credit cards and agree not to apply for any new credit while on the plan.
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