Whether you’re looking to simplify your credit card payments or consolidate high-interest debt, a balance transfer credit card may help you achieve your financial goals.
Balance transfer credit cards typically have very low introductory interest rates on transferred balances for a specific period of time. They can help you save on interest and pay off debt faster, but before you make the switch, there are some key factors to consider.
How Much Do You Have to Transfer?
Before signing up for a new balance transfer credit card, confirm the amount of money you can transfer. Some cards may only allow you to transfer an amount worth half your credit limit, for example. So, if the credit limit on your new card is $10,000, you may only be able to transfer $5,000 onto it. Ideally, you want to find a card that offers a credit limit high enough to accommodate all of your debt.
If you can’t qualify for a card with a credit limit that is high enough, you’ll need to weigh the pros and cons of having two cards. Transferring even some of your balance may help you save on interest, but the balance transfer fee may cancel out the benefit of partially consolidating your debt.
Balance Transfer Fee
Most balance transfer credit cards charge a transfer fee. The fee is typically a percentage of the amount you transfer, ranging between 1% to 5%. For example, if you want to transfer $5,000 and the balance transfer fee is 3%, you’ll have to pay an additional $150.
Before you commit to a new card, calculate whether the amount you can potentially save in interest outweighs the transfer fee.
Interest Rates
Before selecting a balance transfer credit card, make sure you understand how the card handles interest rates. There are often two rates: the promotional rate and the regular rate, which comes into effect after the promotional period ends.
Promotional Interest Rate
Many balance transfer credit cards offer low or 0% interest for a limited time.
To save on interest and pay off your debt faster, look for a card with a 0% promotional rate and pay off as much of your transferred balance as possible during the promotional period.
Note that unless the promotional rate is 0%, you will start accruing interest as soon as your balance transfer is finalized, but at the new lower rate.
Interest Rate After the Promotional Period
Once the promotional period ends, your interest rate will increase to the regular rate. For example, your rate may increase from 0% to 20%. If you haven’t paid off your transferred balance, this new interest rate will apply to the remaining amount, plus any new purchase.
Length of Promotional Period
A promotional period on a balance transfer credit card typically ranges from 6 to 18 months. To save the most on interest, aim to pay off as much of your balance as possible during this time.
New Purchases
While the low or 0% promotional interest rate applies to balance transfers, it might not apply to new purchases. Instead, new purchases may be charged at the card's regular rate. So, while you pay 0% on your balance transfer during the promotional period, you’ll pay the regular rate (say, 20%) on any new purchases. If your aim is to reduce your debt, consider limiting new spending while you pay down your balance.
Is a Balance Transfer Right for You?
While a balance transfer credit card can help you save on interest and pay off your debt faster, it’s important to understand all of the card's features and costs.
Ideally, you want to be able to transfer all your high-interest debt to the new card, so you’ll need to make sure the credit limit is high enough. You also want to compare your potential savings to your transfer fee to make sure a balance transfer credit card is worth it.
Look for a balance transfer card with a long promotional period and a 0% interest rate. Then, aim to pay off as much of your balance as possible before the promotion ends and your interest rate rises.
