What is a Balance Transfer? Pros, Cons, and is One Right For You?

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By Janet Berry-Johnson, CPA

If you have credit card debt, a balance transfer can be a useful tool for lowering your interest rate and paying down your debt faster. However, there are several things you should know about balance transfers before accepting an offer.

Let’s dive in…

In this article

What is a balance transfer?

A credit card balance transfer allows you to move debt from one or more credit cards to another card – often with a low or zero interest rate for a limited time.

You still have to repay the debt, but you may simplify your monthly payments, reduce the amount of interest you'll pay, and pay off your debt faster.

For example, say you have three credit cards, each with a different Annual Percentage Rate (APR):

  • Card A with a $2,000 balance, 18% APR, $80 minimum payment
  • Card B with a $3,000 balance, 22% APR, $120 minimum payment
  • Card C with a $1,000 balance, 20% APR, $40 minimum payment

Now, say you receive an offer to transfer all $6,000 to Card D with a 0% interest rate for 12 months.

Should you take it? Maybe.

Pros and cons of balance transfers

Before taking advantage of a balance transfer offer, make sure you understand the pros and cons.

Pro 1: You can simplify your monthly payments

Suppose you consolidate multiple credit card balances into one balance transfer credit card. In that case, you can focus on one monthly payment with one monthly due date to one card issuer instead of making several payments throughout the month.

This makes it easier to manage your payments and avoid missing a payment and getting hit with late fees.

Pro 2: You can save money on interest

One of the biggest incentives for doing a balance transfer is the potential to save money on interest. If you can transfer your balance to a lower interest rate card, you can save on interest.

Pro 3: You may be able to pay off your debt faster

Many balance transfer cards offer 0% introductory rate on interest for a limited time – anywhere from 6 to 24 months. During that promotional period, any money you pay toward your debt will go towards paying down your principal rather than getting eaten up by interest, which can help you get out of debt faster.

Just pay attention to when the intro APR period ends so you can plan ahead.

Con 1: Most balance transfers come with a fee

Most cards charge a balance transfer fee. According to Experian, those fees usually equal 3% or more of the amount you're transferring.

On a $6,000 balance transfer, a 3% balance transfer fee will cost you $180. That fee is added to your new balance transfer card's balance, and it could offset any benefits you might get from lowering your APR.

Con 2: The promotional interest rate is only available for a limited time

The low or 0% interest rate won't last forever, so make sure you know when it ends and what the APR will be after that.

Con 3: You could get deeper in debt

If you have trouble managing credit cards and are deeply in debt, a balance transfer could make a bad situation worse.

Transferring a balance from one credit card to another doesn't close the old credit card account. If you continue to use the newly paid-off card to make new purchases, you could wind up with even more debt than you started with.

Con 4: 0% APRs might be hard to find and may not last as long

In many cases, you need a good or excellent credit score (650 or above) to qualify for a balance transfer card. But even with a good credit history, a 0% APR balance transfer offer may be hard to come by.

According to a recent article from CNBC:

"Due to the recent economic downturn, many financial institutions are shortening the length of their 0% APR offers or getting rid of them altogether.

Some card issuers, such as Citi and American Express, have cut back on the balance transfer offers provided with their cards to reflect the changing economy and minimize risk."

How to tell if a balance transfer is right for you

If you're considering a credit card balance transfer, there are a few pieces of information you need to determine whether it's the right move. Gather the following information from your most recent statements or by logging into your accounts online:

  • The current balance on any cards you want to pay off
  • The interest rate on each card
  • Your current monthly payments

You also need the following information from your balance transfer offer:

  • The balance transfer fee (and the minimum fee or fee cap, if applicable)
  • The introductory APR
  • How long the introductory APR will last
  • The APR after the introductory period
  • The new card's annual fee (if applicable)

Now, you just need to do a bit of math. Fortunately, you don't need to do the math yourself. There are several balance transfer calculators available online, including Value Penguin's Credit Card Balance Transfer Calculator.

Returning to the example above, let's say your balance transfer card offers 0% interest for 12 months, 17% APR after that, and charges a fee of 3% of the amount transferred, which works out to $180.

The calculator tells us that you would save approximately $1,481 in interest charges by transferring your balance, even after taking the balance transfer fee into account. It would take you two years and four months to pay off your debt at that rate. Making the balance transfer would be better than your current cards.

You could save even more by accelerating your debt payoff after transferring your balance. You'd have to pay approximately $515 per month after the transfer to pay the entire balance before the promotional period ends.

Learn 12 other ways to manage your credit card debt in this guide.

How a balance transfer affects your credit score

A balance transfer will impact your credit score in both negative and positive ways.

When you apply for a balance transfer card, a hard inquiry will appear on your credit report, which can lower your credit score. According to myFICO:

"The impact from applying for credit will vary from person to person based on their unique credit histories. In general, credit inquiries have a small impact on your FICO Scores. For most people, one additional credit inquiry will take less than five points off their FICO Scores."

The balance transfer also opens a new line of credit, which lowers your accounts' average age and can temporarily lower your credit score.

However, a balance transfer can also positively impact your credit score.

Opening a new credit line increases the total amount of credit available to you – assuming you don't close any of your other accounts. That decreases your overall credit utilization ratio (the percentage of available credit you're using).

According to Experian:

"The goal of getting a balance transfer card is to make it possible to pay off debt. If you take advantage of your 0% APR period and use your interest savings to pay down the balance, your credit utilization will decrease over time. That will have the biggest impact on your credit score, along with making all your debt payments on time."

A balance transfer may negatively impact your credit score in the short term, so it's probably not a good idea just before applying for a mortgage or car loan.

However, taking advantage of a balance transfer offer to pay off your debt faster – along with other debt management strategies – can improve your score over time.

How to find the best balance transfer credit card

Balance transfers can be costly if you accept the wrong offer. So how can you find the best balance transfer card for you?

1 - Check your mailbox

If you receive a balance transfer offer in the mail, that's a good place to start your search.

However, receiving an offer in the mail doesn't guarantee the credit card company will approve your application. Once you apply, the lender will take a closer look at your credit, payment history, utilization rate, income and other factors before deciding whether to approve or deny your application.

2 - Search online

Most major credit card issuers allow you to check for pre-qualified offers online. You may need to provide some personal information, such as your name, address and the last four digits of your Social Security number.

Some places to start include:

3 - Visit your local bank or credit union

Many banks and credit unions provide credit cards. If you already have a checking or savings account with a bank that provides credit cards, ask if they have any balance transfer offers available.

4 - Compare the pre-qualification offers

Once you have an idea of the pre-qualification offers available to you, take note of:

  • The balance transfer fees
  • Whether the offer includes low or no interest for an introductory period
  • How long that promotional rate lasts
  • The APR after the introductory period ends

Also, check to see whether the card has a credit limit.

For example:

If you want to transfer $6,000 in credit card debt to a new card, applying for a card with a $5,000 limit won't work.

Keep in mind, many credit card issuers won't allow you to transfer balances between cards you already have with them. For example, if you have a Citi Rewards+ Card, you likely won't be able to transfer the balance on that card to a Citi Simplicity® Card.

How to complete a balance transfer

Once you've selected the right balance transfer card, apply online, via mail, or in-person at your bank or credit union. From there, it may take a few days or weeks to find out whether you've been approved.

Once your application is approved, you typically need to contact the new credit card company to initiate the balance transfer. You can start the process online or via phone.

The credit card company will ask for the account numbers from your existing cards and how much you want to transfer.

Note: It may take a few weeks to complete your balance transfer request, so keep making payments on your existing debt until you receive confirmation that the transfer is complete.

Also, act quickly. Many balance transfer cards provide a limited window of time to take advantage of the promotional rate. If you wait too long, you might miss your chance for low or no interest on the transferred balance.

Final thoughts

Balance transfers can be useful for lowering your APR and getting out of debt faster, but they can be costly if you're not careful. Make sure you understand the fees and APRs involved, choose a card with good terms, and commit to paying off your debt as quickly as possible.

About the author

Janet Berry-Johnson is a Certified Public Accountant and freelance writer with a background in accounting and insurance.

Written on December 29, 2020

Self is a venture-backed startup that helps people build credit and savings.
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Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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