Balance transfers can be an effective tool in tackling your credit card debt and escaping high-interest rates. However, according to a recent balance transfer survey, nearly half of American consumers never used a balance transfer credit card to help pay off their growing credit card debt.
In the U.S. News & World Report study released in May 2019, 48% of respondents said they have never used a balance transfer card. The study found 40% of consumers have credit card debt and of those with credit card debt, 24% had between $1,000 and $2,000 in debt with another 24% having more than $10,000 in credit card debt.
Having credit card debt is bad enough but high interest rates can make paying off debt seem impossible. With most of your monthly payment goes towards interest, It’s easy to feel overwhelmed and wonder if you’ll ever get out of debt.
A balance transfer is simply paying off one credit card with another but it can be very useful in paying off your credit card debt. You can also transfer multiple balances onto a single card, simplifying your finances overall.
Introductory 0% APR Offer
Each balance transfer credit card offers a 0% APR for 12-21 months, allowing you to avoid interest payments for the specific timeframe. By eliminating interest payments, your payments go directly towards paying off the principal, saving you money and enabling you to pay down your debt faster.
In order to get value from a balance transfer, you need to pay off your debt by the end of the introductory offer period. Otherwise, the interest rate on the remaining balance reverts to the regular APR. Instead of getting out of debt, you will be compounding your debt.
When evaluating balance transfer offers for new or existing cards, always look for those that offer the longest zero-interest period, since this will give you more time to save on interest and help you pay down the balance faster.
One thing to keep in mind - not everyone qualifies for the 0% APR offers. Most balance transfer credit cards require very good to excellent credit to qualify for the zero-interest promotion.
Balance Transfer Fees
Almost half of respondents using balance transfer credit cards (45%) didn't know whether their credit card charged a balance transfer fee. Most card issuers charge a balance transfer fee of 3 or 5% on the amount transferred.
Make sure you do the math to determine if the fee makes the balance transfer less expensive than the interest rate on your existing card. Depending on your debt amount, the balance transfer fee can be offset by a long 0% APR.
A few cards on the market do waive balance transfer fees for a certain time period (i.e. first 60 days from account opening). Avoiding the fee can help you start paying down your balances right away.
Terms and Conditions
A balance transfer credit card’s terms and conditions explain the guidelines you need to follow in order to keep the 0% APR offer period. Any fees or penalties are also explained in the terms and conditions. Before applying for the card, make sure you read the terms and fully understand the requirements.
The credit issuer decides your credit limit so you may not be approved for a credit limit large enough to accommodate your total debt amount. You will need to do the math and decide if you still do the transfer and keep some of your balance on the old card.
Tips for Balance Transfer Success
Apply to the right issuer
Typically, you cannot transfer debt from one credit card to another when they’re both issued by the same bank. For example, if your old card is with Citi, you will need to choose a card from another issuer such as Chase to do the balance transfer. This also applies to affiliated cards so make sure to check the issuers of both cards.
Adhere to time limitations
Balance transfers are required to be completed within a certain time period (usually one to two months from account opening) to receive the 0% APR offer. Make sure your read the card’s terms and conditions to understand the time requirement. Request the transfer as soon as you open the account to avoid missing the deadline.
Understand the penalties
After the transfer, you need to make the minimum monthly card payment by the due date to keep the 0% APR. If you miss one payment, not only will you likely be charged a late fee, you could lose your offer rate. If the introductory APR is rescinded, you will immediately start incurring the regular interest rate. You may also be charged a penalty APR as high as 29.99%. Read the terms and conditions to understand all the penalties you could face. To avoid late payments, set up an automatic payment.
Avoid using your balance transfer card for purchases
Your primary reason for obtaining a balance transfer credit card is to dig out of debt. If you make purchases with the card, you will be adding to the debt, not eliminating it. Although some balance transfer cards offer 0% APR on purchases as well as balance transfers, many do not and you will be charged the card’s regular interest rate on any purchases.
Keep Payments Current on Your Existing Credit Card
Keep up your payments of your existing credit card until you receive confirmation the balance transfer is complete. Processing a balance transfer can take two weeks or more and you don’t want to fall behind on your payments and have to pay a late fee.
Don’t Close Your Old Card After Transfer
Unless your old card has an annual fee, you should keep the card open. Closing the card will lower your credit score by shortening your credit history and raise your credit utilization ratio. By keeping the card open, you keep your utilization low. To avoid any temptation to spend on the card, put it away or cut it up.