Put simply, a “credit card balance transfer” allows you to pay off existing high-APR credit card debt with another low or 0% APR credit card, and is typically offered as an option when opening a new credit card.
In a way, it can be considered a refinance, as the existing credit card balance is paid off via the balance transfer credit card, which has a new rate and set of terms.
Let’s look at an example of a credit card balance transfer:
American Express Credit Card: $1,000 outstanding balance @ 20.99% APR
Chase Credit Card: $5,000 credit line @ 0% APR for 12 months on balance transfers
If you accept the balance transfer offer associated with your new Chase credit card, you’ll effectively have the $1,000 balance with American Express paid off by Chase.
So the balance on your new Chase credit card will be $1,000 and the balance on your old American Express card will be $0.
In other words, the $1,000 balance is moved from American Express to Chase. However, you still owe the same amount of money (plus any balance transfer fees), but the credit card APR in this case will be set at 0% for 12 months.
The main advantage of accepting this particular balance transfer offer is that you’ll be paying 0% APR for an entire year on that $1,000 balance, as opposed to 20.99% APR.
If you keep the balance on the American Express card, you’ll pay roughly $17.50 in interest each month, or $210 annually (using simple math).
With the 0% balance transfer credit card from Chase, you wouldn’t pay any interest at all for the first 12 months.
The only catch is you may have to pay a balance transfer fee, which is usually around 3% of the balance, although some credit card issuers offer no fee balance transfer credit cards as well.
In the example above, you’ll still have to make a minimum payment on your $1,000 balance each month, but if you pay roughly $83 a month, you’ll be debt free in a year with no interest (finance charges) paid!
That’s the ideal balance transfer situation.
Where to Get a Balance Transfer Credit Card
At this point you may be thinking a credit card balance transfer could be a good idea. So where and how do you get your hands on one you ask?
Wells, banks and credit card issuers almost always offer balance transfers at the time of application for a new credit card.
They typically offer either a low fixed rate for the life of the credit card balance, such as 2.99% until it’s paid off, or 0% for a promotional period, usually 12 months and up. Some are as long as 18 months at the moment.
And if you apply for a credit card online or by mail, you’ll likely be offered a balance transfer option when you receive your new card.
But instead of taking what comes to you, look for balance transfer offers online. There will always be a better deal waiting for you as banks constantly compete for our business.
Ultimately, banks and creditors pitch low interest-rate balance transfers offers with the hope you’ll carry the balance with them, and eventually pay a good amount of interest to their bank instead of your existing one.
After all, most consumers don’t have the responsibility and know-how to pay zero interest for the entire balance they transfer. And this is what the credit card issuers bank on.
But if you’re a wise consumer, and stay on top of your monthly payments and due dates, and make sure your balances are transferred before any interest is collected, you can win the credit card balance transfer game.
Just keep in mind that this isn’t an invitation to spend frivolously or not pay your credit card balance in full. It’s a way to avoid paying interest by outsmarting the credit card companies. Or rather, by simply being responsible.
Consider Transferring a Store Credit Card Balance
Suppose you buy a flat-screen television from Best Buy and open a credit card account with them to finance the purchase.
They’ll likely offer you a store credit card with an astronomical interest rate, something in the double-digits to be sure.
Instead of paying sky-high finance charges tied to the Best Buy credit card, you can initiate a balance transfer in the hopes of getting 0% APR for 12 months or longer.
That way instead of paying a ton of interest to Best Buy, you can pay off the television at 0% APR or at a super-low APR until the balance drops to zero.
So this probably all seems too easy now. Why pay any interest ever, right? Well, there are a few “strings.” Namely, you need to be a good borrower.
And to ensure your promotional APR actually stays low, make sure you do the following:
– Pay ALL bills on time every month to avoid universal default
– Maintain a good credit score so you qualify for all balance transfer offers
– Read the fine print so you’re aware of ALL balance transfer fees
– Organize and stay on top of your multiple accounts (use a spreadsheet)
– Keep number of credit cards (and debt) to a minimum
Choosing a Balance Transfer Credit Card
When choosing a balance transfer credit card, there are a few things to keep in mind when making your decision.
The most important aspects are APR, the amount of time the 0% or low-APR rate is offered, and finally the associated balance transfer fees.
Before looking at the benefits of a balance transfer credit card, you need to assess your credit card debt situation.
This really comes down to whether you have a large amount of debt, or a manageable amount that can be paid off in a short period of time.
How Much Debt Do You Have?
If you’ve got a large amount of debt that will probably take a long time to pay off, you may want to consider a balance transfer credit card with a fixed rate for the life of the balance.
This way you can secure a low rate, usually under 5%, and you won’t have to worry about the introductory period disappearing after six or 12 months. Some of these low-APR balance transfer credit cards don’t charge a balance transfer fee either, making them another good choice for those with large amounts of debt.
After all, if you need to transfer $10,000 and the balance transfer fee is 5%, you’d wind up paying $500 at the outset.
A fixed rate balance transfer credit card also means you won’t need to apply for another 0% APR credit card once your credit card APR spikes back up to the purchase rate, which could likely be above 20%.
Applying for too many new credit cards can hurt your credit. On top of that, there’s no guarantee you’ll continue to get approved for subsequent balance transfer requests.
Shoot for a 0% APR Balance Transfer If You’ve Got Manageable Debt
If you’ve got a relatively small amount of debt, you may want to consider a balance transfer credit card that offers 0% APR for an introductory period, whether it’s just 12 months or longer.
You should be able to find a balance transfer credit card with 0% APR for the first 12 months if you’ve got decent credit, and if you feel you’ll be able to pay off the credit card debt in a year, this is a great way to avoid paying any finance charges whatsoever.
For example, if you transfer $2,400 to a 12-month 0% APR balance transfer credit card and can make $200 payments each month, you’ll be debt free by the time the promotional APR expires. Even if you don’t pay the entire balance off, it could be cheaper than a low fixed rate alternative.
The Cons of a Credit Card Balance Transfer
While I have mostly highlighted the positives of executing a credit card balance transfer throughout this site, I felt it would be fair to discuss some of the negative aspects as well.
One clear negative to a credit card balance transfer is the associated fee, which is typically 3% of the amount transferred, with a minimum of $5, and a maximum of $100. However, fees can be as high as $150 (or may have no limit at all), so be sure to read the fine print carefully to find out the max fee on your specified balance transfer.
Additionally, balance transfers are typically accompanied with credit inquiries, as banks will need to check you out to ensure you’re a qualified borrower before granting you a new line of credit, which is really what a balance transfer is, a new line of credit. Often a brand new credit card.
As you may know, credit inquiries will ding your credit score in the short term, although the impact shouldn’t be too extensive. However, if you continually execute balance transfers, credit inquiries will pile up and your credit score will be sure to suffer.
That’s why it is important to use balance transfers sparingly, and only when absolutely necessary. After all, you don’t want to damage your credit score to save a few bucks in finance charges do you?
Just remember to always consider the long and short term before jumping into a commitment. Decide how you want to tackle the debt. A 0% APR credit card may be enticing, but you may save more money if you stick with a low fixed APR credit card for the life of the balance.
And if you continue to carry balances, you may run out of options or end up paying interest when the 0% APR period comes to an end. Be sure to factor in associated balance transfer fees, and don’t forget about sky-high default APR, which comes into play if you miss a payment.
A major part of credit card management is planning, and without a solid plan, you’ll likely run into trouble and wind up paying more than you originally anticipated.
*Keep in mind that nowadays most balance transfer credit cards come with a balance transfer fee, though there are still some no fee balance transfer credit cards out there.
Also understand that a credit card balance transfer may take several weeks to post, so don’t rely on the new credit card issuer to pay your monthly credit card bill before its due date.
When applying for a balance transfer, you should continue to pay your credit card bill as usual, regardless of the status of the balance transfer.
If you rely on the balance transfer alone, and the post date is a day late, it could ruin everything, and crush your 0% APR hopes for a long time.
At this point you should know a lot more about how a credit card balance transfer works and how it can save you a ton of money.
(photo: Pink Sherbet Photography)