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If you're carrying a lot of credit card debt, balance transfer credit cards can help you get it under control by eliminating interest on balances you transfer. Balance transfer credit cards offer a low or 0% introductory APR for a limited time on the amount you transfer.
Balance transfers come at a cost, however: You'll be charged a balance transfer fee that is rolled into your balance on the new card. To avoid a balance transfer fee altogether, you'll need to find a card that doesn't charge this fee. If that's not possible, the next best thing is to look for a card with a low balance transfer fee. In both cases, you'll want to pay off the balance before the introductory period ends to avoid any interest charges.
How Balance Transfer Fees Work
When you transfer debt from a credit card or loan, such as an auto loan, payday loan or home equity line of credit, to a new credit card to get a lower interest rate, you'll likely be charged a balance transfer fee. This fee amount is determined when you initiate a balance transfer and automatically becomes part of your outstanding balance.
Once you're approved for a balance transfer card, the credit card company will confirm your credit limit. When you ask the card issuer to transfer your eligible debts to the new card, they will either send you a check for the amount being transferred or pay that amount to the lender(s) directly. Your new credit card's balance will reflect the amount you transferred plus the balance transfer fee (typically 3% to 5% of the amount transferred).
While it's not impossible to find a card with no balance transfer fee, they are somewhat rare. Instead, it might be best to consider your reasons for a balance transfer, whether the fee is worth it, what benefits you'll get from your balance transfer card and what other alternatives may exist.
What to Keep in Mind When Transferring a Balance
If you're considering getting a balance transfer card, here are some things to consider.
- Can you pay off the transferred balance before the 0% introductory APR period ends? If not, interest on any remaining balance will start to accrue. Depending on the regular APR the new credit card charges, you might end up paying more in interest than if you hadn't transferred a balance.
To avoid paying interest, try to avoid using the balance transfer card for any new purchases and focus on paying it off before the introductory period expires. According to a recent Experian survey, most people who use balance transfer cards are successful at paying them off during the promotional period.
- Does the savings in interest outweigh the balance transfer fee? Calculate what the balance transfer fee will be and weigh whether paying that additional cost is worth the savings in interest. In most cases, the answer is yes, but if you're transferring a large balance to a card with a 5% balance transfer fee, your savings may be reduced.
The only way to avoid a balance transfer fee is to find a card that doesn't charge one. Such offers are generally reserved for people with good to excellent credit. If you're not sure you fit that description, check your credit score to find out.
- Have you read the fine print? Balance transfer fees are typically 3% to 5% of the balance you transfer. Also look for extra costs such as annual fees, late fees and foreign transaction fees that come with the card.
And do keep in mind that a card that offers 0% APR on balance transfers may not offer 0% APR on purchases. If you plan to use the new card for purchases, make sure you are clear on whether new charges will accrue interest and what that interest rate will be.
How to Choose a Balance Transfer Card
To choose the best balance transfer card for your needs, consider the following:
- How long does the 0% introductory APR last? Common introductory periods are 12, 15 or 18 months; you may even be able to find cards that offer 21 months. A longer introductory period gives you more time to pay off your balance; if you're transferring a large balance, this gives you greater flexibility.
- Does the introductory 0% APR also apply to purchases? If so, for how long?
- Once the introductory period ends, what is the APR on purchases? (Know the APR of your current credit cards so you can compare.) If you miss a payment, will your APR increase?
- What fees are involved? In addition to balance transfer fees, some cards charge an annual fee or impose fees for late payments or foreign transactions. Weigh these fees against the savings the 0% APR offers.
- Does the card offer any rewards? Cash back, travel rewards and purchase protection are among the perks some credit cards offer. But because your primary focus when choosing a balance transfer card is consolidating debt, benefits shouldn't be the deciding factor. If you do plan to use the card after you've paid off your transferred balance, however, it doesn't hurt to take perks into account as well.
Balance Transfer Card Alternatives
Most balance transfer credit cards require good to excellent credit. Fortunately, a balance transfer credit card isn't your only option for paying down debt if your credit scores could use some work. Consider these alternatives:
- Debt consolidation: If you're juggling payments to several different creditors, getting a debt consolidation loan could simplify your life by rolling all your debt into one loan. It could also save you money if the interest rate on the new loan is lower than the rates of your outstanding loans. You use the loan proceeds to pay off your creditors, then make just one monthly payment to the debt consolidation lender. This could make it easier to keep track of what you owe and avoid missing a payment, which can hurt your credit score. You can even find debt consolidation loans designed for people with less-than-stellar credit.
- Credit counseling: Trying to pay off large amounts of debt can feel overwhelming. If you're having trouble paying down debt and improving your credit on your own, you may want to get help from a credit counseling service. Be careful to use a reputable credit counseling service—typically, these are nonprofit organizations affiliated with the National Foundation for Credit Counseling. Watch out for fraudulent credit repair services that promise to fix your bad credit instantly or wipe out your debt. Such companies may charge exorbitant fees or advise you to lie about your identity to "fix" your credit, which can get you in even deeper financial trouble.
- Debt management plan: A legitimate credit counseling agency may suggest setting up a debt repayment plan called a debt management plan (DMP). The credit counselor negotiates with your creditors to create a new payment plan for you, which may involve reducing your interest rates, waiving fees or otherwise lowering your balances. You pay the counseling agency every month; they use the money to pay your creditors (keeping a small fee for themselves). Most DMPs are designed to pay off your debts within three to five years. The credit counseling agency typically provides ongoing counseling to help you learn and maintain good credit habits.
To decide if a balance transfer card can work for you, check out Experian CreditMatch™ to see which balance transfer offers you may qualify for. Look at the details of each offer and calculate how much you can save in interest, the fees you'll have to pay, and whether you can realistically pay off the transferred balance before the introductory APR offer expires. Used correctly, a balance transfer card is a valuable tool that can save you money and help you pay off high interest debt faster.