What You Need to Know About Credit Card Balance Transfer Offers
It seems like a no-brainer. You get an ad offering 0-percent interest for 12 months when your transfer a credit card balance to a different credit card. You can accept and try to pay down the debt without having to pay interest. Or you could keep the balance where it is and pay the 18- or 19-percent APR you’ve been stuck with. Why wouldn’t you jump all over the offer?
Because nothing is ever that simple.
Remember, that credit company offering the zero percent interest rate isn’t making the pitch because it wants to lose money. Balance transfers can be a great tool for people who are trying to pay down debt, but you have to dig deeper before you sign on the dotted line.
Work + Money reached out to personal finance experts and asked them what we should be looking for when we are considering a credit card balance transfer. We also wanted to know when it makes sense to accept an offer and when we should sit tight. Here’s what they told us.
[Note: Work + Money receives a commission from our affiliate partners via our links, but our reporting and recommendations are independent and objective.]
Beware of Fees
Brandon Opre, a certified financial planner with TrustTree Financial in Clearwater, Florida, says transfer fees are often overlooked when consumers focus only on finding the lowest rate. That’s a mistake, Opre said. Fees can be as high as 5 or 6 percent of the balance transferred, and they are rarely less than 3 percent.
“You have to look far and wide to find something that is two percent or less,” he said. “This fee is important because it can offset the benefit of the transfer. While it makes sense to transfer to a card with a lower interest rate, the balance transfer fee can potentially negate the benefits, so be aware of that.”
Know How Transfers Will Impact Your Credit Score
Moving balances back and forth between cards can signal problems to creditors, said Freddie Huynh, vice president of credit risk analytics with Freedom Financial Network. Credit utilization, a key factor in determining your credit score, may also dip if you transfer the balance to card with a lower credit limit, he said.
Huynh also warns that opening a new credit card account to secure a balance transfer offer – or even applying for one – can cause your credit score to dip.
Don’t Forget About Credit Account Age, Either
It’s another factor in credit scoring. Getting that new card lowers the average length of time your accounts have been open, and that can hurt your score as well.
Use Balance Transfers as Part of Your Debt Reduction Plan
And stick to that plan.
“Balance transfers can be helpful for some people carrying credit card debt,” Huynh said. “If accounts have high interest rates, which are creating high minimum payments, transferring to a low-interest, or zero-interest card can help a motivated person pay off the debt.”
He adds: “For someone having a hard time making even minimum payments, a balance transfer likely won’t help. They may need to look at debt settlement.”
Know That Not Everyone Gets a 0-Percent Rate
Yes, that bold promise is tempting, but you need to read the fine print, says Richard Best, a writer for dontpayfull.com, a savings, discount, and coupon aggregator that also provides tips and education for saving money and managing personal finances.
“The small print will tell you that you have to be able to qualify for it,” Best said. “If your credit is deemed less than excellent, you may wind up with an 8-percent rate, or even a double-digit rate. Worse, you won’t know which until the card is actually approved. Before applying, it is important to know your credit score and have some idea of what qualifies for the 0-percent rate.”
Know When the Introductory Period Ends
How long the introductory rate lasts can have more of an impact that how low the rate is, Best says.
“Transferring a large balance to another card, while providing temporary interest rate relief, can be problematic if the period is too short because you will find yourself holding high interest rate debt if you can’t pay it off in time,” he said.
Typically, credit card companies offer a standard, six-month period, but some of the more aggressive offers go up to 12 months.
“Recently, we’re seeing an increasing number of 15- to 18-month offers from Citi, Chase, Discover, and Capital One,” Best said. “But, again, the length of your introductory period will be contingent on your credit standing.”
Know the Post-Introductory Period Rate, Too
When you’re applying, make sure you know what the regular rate will be once the introductory period ends. It may be higher than the card you are transferring from.
“Many people find themselves still carrying a balance when the introductory period expires, and, in many cases, they experience APR shock when it suddenly skyrockets to 19 percent or higher,” Best said. “The best deals are the ones that offer a more reasonable post-introductory APR. Again, your credit standing will dictate whether you get the best rate or something at the higher end.”
Don’t Use the Old Card
You must avoid the temptation of racking up the balance again on the now paid-off card.
“The key is to be committed to eliminating the debt, not just getting a new card and racking up more purchases. If you can’t do this, avoid the balance transfer,” Huynh said.
Don’t Use the New Card for Purchases
Best advises people to avoid using the card you transfer the balance to for purchases. That’s especially true for cards that don’t extend the low introductory rate to purchases as well as transfers.
“If your card does charge interest on purchases, your payments are first applied to the 0-percent balance, which means you will continue to accrue interest on your purchase balance,” he said.
Consider a Personal Line of Credit Instead
A personal line of credit probably won’t offer a 0-percent interest rate, but over time – the time after that introductory offer ends – it can offer a much lower average rate when compared to credit cards.
Bill Westrom, creator and co-founder of TruthinEquity.com and co-author of “Master Your Debt,” recommends having your direct deposit paycheck go directly into the line of credit.
“This reduces the balance much faster than a regular monthly payment, which means you pay less in interest throughout the month,” he said. “Keep the balance low to improve cash flow and pay less interest.”
You Should Transfer a Balance if...
...you can pay off the entire balance in the promotional period, said Michael Micheletti, head of corporate communications at Freedom Financial.
“If you have several different debts with high interest rates and can pay off all of your existing credit card debt within the promotional period, balance transfer cards may be the right debt consolidation solution for you,” Micheletti said. “But if you have a lot of credit card debt and can’t afford to pay it all off within the promotional period, a balance transfer card could land you in the same financial situation that you were stuck in before.”