If you have credit card debt, a balance transfer to a card with a lower interest rate may cut the total cost of your debt. But before you leap to a balance transfer as the solution to your debt problem, do a little math to find out if it will actually save you money. Even though a zero percent interest rate on a balance transfer offer may sound appealing, transfers are rarely free. Most companies will charge you fees—usually 3 to 5 percent of the balance—to complete the deal. Include the transfer fee when you do the math to see if a balance transfer cuts your total debt cost.
How Much Money Could a Balance Transfer Save You?
A three or four percent difference in a credit card interest rate may seem insignificant, especially if you rarely carry over your credit card balance from one billing cycle to the next. But if you regularly carry a balance, the cost of interest adds up. Consider the following example, which shows how long it takes and how much interest it costs to pay off a $5,000 credit card balance if you make monthly payments of $109.
| Interest Rate | 18% | 14% |
|---|---|---|
| Total Interest Paid |
$3,529 |
$2,199 |
| # of Monthly Payments |
79 |
66 |
| # of Years to Pay Off Debt |
6 years, 7 months |
5 years, 6 months |
If you make monthly payments of $109, a credit card with a 14% APR costs you approximately $2,199 in interest paid. This is $1,330 less than the interest cost you would pay with an 18% APR credit card. Just don't forget to factor in the balance transfer fee when totaling your savings. If the balance transfer fee is more than the amount you'll save on interest, a balance transfer may not be worth it.
Credit Card Balance Transfers: The Pros
If done right, a credit card balance transfer can help you accomplish a variety of financial goals. Consider these:
The most obvious reason to consider a balance transfer is to save on the total cost of borrowing: A higher interest rate means you'll spend more money to pay off your debt. You can easily calculate the total amount you would save if you lower your interest rate with an interest cost calculator.
Numerous due dates from your various credit cards, utility bills, and other household expenses may prove not only confusing but also stressful. Transferring all of your credit card debt to one card can greatly simplify your payment responsibilities. Easier tracking eliminates or minimizes missed payment dates and also helps you see your total credit card debt, which promotes better household debt management.
Some credit card balance transfer offers will let you transfer other kinds of debt that often have higher interest rates, such as auto loans, student loans, appliances or furniture loans. But you'll need to do your homework in choosing the right balance transfer offer: Some card issuers restrict the types of debt that you can transfer to their credit card accounts.
Credit extended through a consumer credit card is usually considered an unsecured loan, which means you provide no collateral to back up your promise to repay. Paying off secured loans with your credit card lowers your risk should the worst happen and you default on your credit card balance. That's because a credit card company can't easily seize your personal assets to satisfy the debt. A good example of this is paying off a car loan with a credit card and then transferring the balance to take advantage of a low or zero-interest rate offer. Even if you later default on the credit card, your car loan has been paid in full and the card company can't as easily seize your car in lieu of credit card payments.
Increasing your available credit balance factors positively into your overall credit score. By taking on a balance transfer offer through a new credit card account and keeping your remaining credit card accounts open, you can help boost your credit score over time as you demonstrate responsible repayment behavior and you pay-down the amount of your debt.
4 Key Things to Consider Before a Balance Transfer
To woo you to do business with them, credit card companies often offer low or zero-interest rates for transferring existing balances to a credit card account with them. But in considering whether you want to move ahead with a balance transfer, you should know that the new rate doesn't last forever. View the new rate as two-pronged: the introductory or promotional rate and the long-term rate.
The introductory or promotional rate is the short-term interest you pay and usually lasts no longer than 18 months. Companies are legally required to offer a promotional period lasting at least six months. After the promotional period ends, the rate jumps to the long-term rate, which could be the same or even higher than the rate you pay with your existing credit card account.
Many card companies charge a transaction fee on balance transfers. The fee is either a fixed dollar amount or a percentage of the balance being transferred, whichever generates the higher amount. According to the Federal Reserve, the average fee is 3 percent. If, for example, you want to transfer a balance of $5,000, you're looking at a $150 one-time fee right off the bat. You'll need to factor in the transaction fee to see whether it's worth the cost to transfer your credit card balance.
Many balance transfer credit cards offer rewards programs or other bonuses. If you think you're able to pay off the transferred balance fairly quickly, you can then use the card for ongoing spending and take advantage of its reward programs. You can earn points for use in travel, hotels, dining, gas stations and retail stores. You can even earn cash rewards through cash back on your spending.
For new customers of a credit card company, it takes about three weeks from the start of an application until a transfer is completed. For existing customers, it takes about a week. If the balance you're hoping to transfer involves a secured loan and you foresee being unable to make a payment and subsequently defaulting, you may need to choose the credit card company that allows a balance transfer sooner, like your existing bank or credit union, even if its APR is higher than another company's offer. Without a quick turnaround time on your balance transfer application, you won't be able to avoid defaulting on the car loan and having the repo man pay a visit to your driveway.
Expert Q&A: Common Balance Transfer Questions
Melinda Opperman
Expert
Melinda Opperman, the chief relationship officer at credit.org, weighs in on questions you might have if you're considering using a credit card balance transfer to manage your debt.
What mistakes do borrowers make when transferring balances?
Not weighing the pros and cons. Every balance transfer offer looks tempting. Some are a good deal, and some could leave you in a worse position. Make sure you're making some significant payments, so when the zero percent period ends, you're not paying an even higher interest rate. When you transfer to another account, the account is going to incur a balance transfer fee, typically 3 percent. So if you transfer $10,000, it's going to cost $300. You want to factor that in. Am I going to delay the inevitable? Is this going to be advantageous to me? Am I going to be able to pay off this before the zero percent period ends?
What pitfalls should I watch out for?
If you miss a payment, the deal's off. You're going to go back to the regular interest rate on your entire balance. Even if you do make payments on time, if you're making new purchases on that card, the new purchases may not be at zero percent. Sometimes they are, sometimes they're not. Credit card companies are trying to poach balances - that's where they make their money. If you don't pay off the balance during that low introductory period, once you go past that, you're going to be paying perhaps a higher interest rate than you would have before.
How much of a hit will my credit score take with a balance transfer?
Typically 10 to 30 points. In order to even attempt a balance transfer, you have to have favorable credit. Card issuers don't offer these deals to consumers with poor credit. You likely are going to close out the existing card, so that could affect your length of credit history. And you're going to get an inquiry.
When is a balance transfer a bad idea?
If you don't have a plan to pay off the balance, you could just be kicking the can down the road. In six months or 12 months or whenever the introductory period ends, you're looking for another balance transfer. It becomes a habitual, serial behavior, and you're not really addressing the underlying issue. And then you have to pay the 3 percent balance transfer fee, and if you miss a payment, you could get hit with a higher rate. Balance transfers can be an expensive way to feed a credit card habit.