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Balance transfer credit cards are a method of consolidating multiple debts into one.
They typically offer a 0% annual percentage rate, or APR, for a period of time. That means you can transfer higher interest debt to a balance transfer credit card and pay it down without paying interest. It's crucial, though, to avoid adding to the debt with new purchases and to eliminate it by the time the promotional period ends.
If you're considering a balance transfer credit card, read on for more about how they work, when they're a good idea and how opening one could affect your credit.
How Does a Balance Transfer Credit Card Work?
When you want to move debt to a balance transfer credit card, you'll first apply for the card you've identified as the best option for you (more on how to decide later). If you're approved, the credit card company will determine your credit limit based on factors like your credit history and income. That limit is the total amount of existing debt you're eligible to transfer to the new card.
You'll then request that the credit card company transfer balances to the new card, and specify how much of those balances to move. If you have $2,000 on a Chase card and $3,000 on a Discover card, for instance, and transfer both balances to an American Express card, you'll now have a balance of $5,000 with American Express. The new company will pay off your previous debts, which could take up to a few weeks. In the meantime, continue to make minimum payments toward your prior debts until you've confirmed the transfer to the new card is complete.
High interest credit card debt is an excellent candidate for a balance transfer, though you generally can't transfer a balance from one card to another that's issued by the same company. You may be able to transfer other types of loans to the card, depending on the credit card issuer, but check with the one you're interested in about its policies before applying.
When to Consider Using a Balance Transfer Credit Card
A balance transfer is only a good idea when it will allow you to save money. That means the APR on the balance transfer card must be lower than your current APR, and you must be able to pay off the debt you transfer before the promotional period ends. If you're given 15 months at 0% APR, make a plan to pay off the debt within those 15 months, before your APR jumps.
Balance transfer credit cards are generally only available to those with good or excellent credit, or a credit score of 670 or higher. That means you're ready to consider getting a balance transfer card once your credit score qualifies you for one.
Downsides of Using a Balance Transfer Credit Card
Not everyone will qualify for a balance transfer credit card. If your credit score isn't yet in the good or excellent range, work on improving it by checking your credit report for errors, paying down balances, making all payments on time and avoiding opening new lines of credit unless you need them.
You'll likely pay a balance transfer fee, which is calculated as a percentage of each transfer. Your credit could also take a temporary hit as a result of your application for new credit. If you stand to save a significant amount in interest, however, the pros of using a balance transfer card could outweigh the cons.
What Are Balance Transfer Fees?
Most cards charge a balance transfer fee whenever you move a balance to them—typically 3% or 5% of the transferred amount. But some cards don't charge balance transfer fees, often for a specified period of time. The ideal scenario is to simultaneously pay no balance transfer fee and to make use of a 0% APR offer, which would make the transfer free.
If you don't qualify for a card with one of these offers, it's generally best to go for a card that charges 0% APR over a card with a lower balance transfer fee. In many cases, paying the fee is worth it to avoid paying interest as you get rid of debt.
How Does a Balance Transfer Affect Credit?
A balance transfer can impact credit in the following ways, which are important to consider when deciding whether to pursue it.
- A balance transfer will result in a hard inquiry. Whenever you apply for new credit, a hard inquiry appears on your credit report. That shows lenders how often you're seeking additional credit lines. Many hard inquiries in a short period of time could be a warning sign that you're not using credit responsibly. A hard inquiry stays on your credit report for about two years, but its effect diminishes over time—and is less consequential than whether you've paid bills by the due date or kept debt balances low.
- A balance transfer can lower your credit utilization rate. The amount of debt you use compared to your credit limit is called your credit utilization rate. A $1,000 balance on a card with a $5,000 limit translates to a 20% utilization rate, for instance. Keeping your utilization under about 30% will help you avoid negatively impacting your credit.
When you apply for a new card and receive an additional credit limit, the total available credit across all of your cards increases. In other words, you still have debt, but it's a smaller portion of your total credit line. Plus, since the debts you transferred are no longer on your previous cards, your new utilization on those cards is 0%. This change in credit utilization can strengthen your credit score, as long as you don't continue adding to the debt and you pay it off over time.
How to Get a Balance Transfer Credit Card
When shopping for a balance transfer credit card, first evaluate your credit score to determine whether you're likely to qualify. Then take a look at each balance transfer credit card's features, including its:
- Introductory balance transfer APR: How much you'll pay on transferred balances during the promotional period (ideally 0%).
- Length of promotional period: How many months you'll have to pay down balances at 0% APR, and whether you need to transfer balances within a certain time frame.
- Introductory purchase APR: How much you'll pay on new purchases you make with the card, if there's an introductory rate.
- Ongoing, or standard, APR: How much you'll pay on transferred balances and purchases after the promotional period is over.
- Fees: How much the card charges in balance transfer fees, annual fees, late fees and foreign transaction fees if you're a frequent traveler.
- Additional perks: Some balance transfer cards offer cash back rewards, but tread lightly during the promotional period—that may entice you to spend, when your goal should be to get rid of debt.
Is It Right for You?
Balance transfer credit cards can be a strategic partner on your debt payoff journey, as long as you use them the right way: to get rid of debt at 0% APR.
Before deciding on a balance transfer card, understand how long you'll need to realistically pay down your current balances, and choose a card that gives you at least that much time. It's also useful to assess your budget and potentially cut expenses so you don't have to rely on credit cards during payoff—and wrap up your card's introductory period debt-free.