Transferring a zero interest balance can be a financial lifeline to help you avoid modest credit card debt. But for some, transferring the balance can actually make your debt situation the worst.
Here’s how to know if you should apply for a credit card balance transfer or not.
What is a balance transfer?
Simply put, a balance transfer is the transfer of your debt from one card to another. You pay efficiently with a credit card from a credit card.
So what’s the point? After all, you still have the same amount of debt after the balance transfer.
Actually there are several reasons:
- A strategic balance transfer can help you pay off small credit card debt. For example, you can transfer your debt from a credit card with a high interest rate to a card with a lower interest rate.
- You can win a card with an introductory offer of 0% per annum on balance transfers.
- You can use a balance transfer to consolidate debt across multiple cards.
But if you’re not careful with credit card spending or don’t pay off the transfer before the end of the 0% APR promotion, then transferring your balance could actually add to your debt.
Read more: What is a credit card with balance transfer?
Pros and cons of balance transfer
Pros: You can save a lot on interest payments
If you have a piece of card debt that is charging exorbitant interest rates, you can save significant money by moving that debt to another card with a lower interest rate.
Some cards also come with an introductory 0% annual interest rate. By transferring your balance to one of these cards, you will get a reprieve (often 12 months or more) from interest charges. This means that every dollar you pay goes towards the principal you owe.
Pros: you can consolidate debts
If you have debt spread across multiple cards, a balance transfer can be an easy way to consolidate your debt.
By transferring your balance to one card, you will only receive one monthly payment, which can make your payments more convenient and even help you put more money towards the amount you owe.
Cons: there are usually fees
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Balance transfers are usually (but not always) subject to a fee of up to 5%.
This means that if, for example, you transfer a $5,000 balance to your card, you will be charged a $250 fee for this privilege.
Read more: How do credit card balance transfers work?
Cons: It’s easy to increase your debt if you’re not careful
After you consolidate your debt, you can get all the available credit you have on your previous cards.
Similarly, if the card you transferred your balance to has 0% APR, you might think you can afford to live beyond your means for a while as you won’t be paying any interest.
This can turn your situation into something much worse.
So, should I transfer my credit card balance?
If you are in a good financial position (a stable job, good credit score, modest credit card balances, etc.), transferring a balance that is currently on a high APR credit card can save you some serious money. This means that you will be able to pay off your balance faster.
If you are NOT in a good financial position, say with depleted credit cards and late payments in your account, a balance transfer is not for you.
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There are several reasons for this.
First, credit cards that offer balance transfers require a good credit history. You do not need big credit, but you at least need a streak of good habits on your account. And if your debt is too high, a balance transfer can make things worse.
Balance transfers provide temporary relief from high interest rates, but they can make the problem worse by giving you more credit, which you end up using when money gets tight.
Before transferring the remainder, ask yourself the following questions to see if this is right for you.
- Are you determined to get rid of credit card debt for good? Is there any chance that you will transfer the balance and then start using the old credit card again?
- Is there a fee for transferring a balance? Make sure you save money in the long run.
- Do you have good enough credit to be approved for a balance transfer card in the first place?
- Is your credit sufficient to get approved for a card with a significant line of credit? Getting approved for a balance transfer card with a $1,000 line of credit probably won’t help you much.
Banks will generally not give you a new loan if you have used up or are very close to the limits on all your credit cards. This makes you seem too risky, i.e. living beyond your means. And late payments are the nail in the coffin of your credit history.
The rule of thumb is that you are more likely to be approved for a balance transfer credit card if your credit score is at least 700.
Read more: How Credit Works: Understanding the Credit Reporting System
What to look for in a credit card with balance transfer
OK. You have decided that a balance transfer is appropriate for your situation. The next step is to find the perfect credit card.
There are several attributes you should look for in a credit card for balance transfer:
- 0% introductory annual — Many cards offer a window to pay for a balance transfer without charging interest. The longer this 0% window, the less stress you will put on paying on time.
- Low regular annual interest rate — If you know you won’t be able to repay your balance before the closing of the 0% starting annual interest rate window, you’ll want the lowest current interest rates. Read the terms and conditions of the card to find out what you can expect.
- No commission for the transfer of the balance – Most cards charge a fee of up to 5% for balance transfers. If you can find a card that waives this fee, you can save hundreds of dollars right at the gate.
- Sign up bonus – Balance transfer credit cards sometimes have a cash sign-up bonus that can reward you $100 for meeting modest spending requirements in the first few months after your card is opened. You can use this money directly to pay off your balance.
We’ve also written an article on the best balance transfer credit cards to help you narrow down your search quickly.
Is it worth it to transfer the balance?
Again, you can expect to pay a balance transfer fee of 3% to 5% of the transfer amount. You need to make sure you save more than you spend with the balance transfer.
Here is an example:
If you spend six months paying the balance on a credit card that charges 15% APR, then it makes sense to enter 0% APR with a 5% fee. Of course, the actual break-even point depends on your actual annual income and your monthly payments.
However, if you can pay off the debt in less than six months, you may not save anything with a 0% balance transfer.
So, is a balance transfer worth it for you? To help you figure it out, we’ve created an interactive calculator. Just enter the details of your situation in each field and you will immediately see if it makes sense to open a credit card to transfer the balance.
There are a few more important details to consider before pulling the trigger for a balance transfer. You will avoid unpleasant surprises by preparing for the following scenarios:
You may not be able to transfer your entire balance
While credit card apps will give you a place to list multiple balances you would like to transfer, they do not guarantee that they will transfer them all. The bank will give you the credit limit they think you should have, which may be less than the balance(s) you would like to transfer.
The balance transfer will still take place, but the new card will only pay off part of your old balance, not all of it. If this happens, make the minimum payments on the new credit card while you pay off the balance on the old card as quickly as possible.
Transfer your balance soon
Read the terms and conditions of the card carefully to determine how long you must transfer balances in order to take advantage of the introductory rate. Some cards may require you to do this at the time of application, while others may give you a few days or the entire billing period.
bottom line
Balance transfers can help you pay off a small amount of debt in several ways:
- You can consolidate multiple card debt onto one card, thereby reducing the amount you spend on “minimum payments” each month.
- You can move your debt from a credit card that charges exorbitant interest rates to a card with lower interest rates—sometimes with 0% introductory APR for a few months.
Performing a balance transfer may have adverse consequences, such as fees ranging from 3% to 5% of the transfer amount. But if you’re determined to get out of debt (and not pay!), the pros usually outweigh the cons.