Should You Use a Balance Transfer Credit Card?
Find out when it’s wise to pay off debt using a transfer card and where to find the best one.
Last week I talked about how to pay off your credit cards. But did you know that there's a type of credit card that can help you do just that, so long as you know how to use it? This podcast is about how to use a balance transfer credit card wisely and which cards have the best offers right now. Here’s a clip from a voicemail I received:
“I was curious on what your opinion was on balance transfers and what credit card offers the best option. Thank you so much for your podcasts, they are so informative and I tell all my girlfriends about you. I hope you’re having a good night, hopefully I’ll see the post on your show. Talk to you soon, bye-bye.”
What’s a Balance Transfer Credit Card?
The caller didn’t leave her name, but I certainly appreciate the question and the kind words! For anyone who may not be familiar with balance transfer credit cards, they’re a special type of card that offers a very low or 0% interest rate. That means you can keep a balance on the card without having to pay a penny in interest, in some cases.
You can use a transfer card to pay off higher-interest debt, such as credit cards, lines of credit, or loans, and save a substantial amount of interest. Here’s how it works: After you’re approved for a transfer card, you’ll receive a small supply of checks that you can write on the new account. Let’s say you have a $3,000 balance on a high interest card with the Crafty Credit Bank. If you want to pay off that entire balance and transfer it to the new card, you’d make one of the transfer checks payable to Crafty Credit Bank for $3,000 and mail it to them. Now your $3,000 balance is transferred from your old high-interest card to your new low or no-interest card.
That sounds fabulous, doesn’t it? Well, before you rush to submit an application … there’s a catch. The catch is that the low rate on balance transfer cards is only temporary. It’s an introductory offer that runs out after a certain period of time, typically anywhere from three months to a year. The amount you can transfer is also subject to the credit limit you’re offered. Additionally, most transfer cards charge a fee for each balance that you transfer that could range from 2% to 5% of the amount you move to the card. For example, if you owe $10,000 on a high-interest auto loan and decide to transfer it to a card with a 3% transfer fee you’d be charged $300, increasing your debt to $10,300.
You must have good credit to qualify for the best balance transfer deals. Even though the offer might say 0% interest, you may only qualify for a 12% rate, for instance, which would defeat the purpose of getting a transfer card.
A Good Strategy for Using a Balance Transfer Credit Card
To use a balance transfer card wisely, you must have a solid exit strategy for paying your balance off before the promotional rate expires. You should never, ever transfer a balance without knowing for sure that you’ll be able to pay it off in full before the low rate ends. Shifting debt to a credit card with a lower interest rate obviously doesn’t make the balance go away, but it can make the debt less expensive for a limited period of time. That’s called “optimizing” your debt.
Here’s a situation where doing a balance transfer makes sense: Let’s say you’re having a good year at work and are going to receive a $5,000 bonus within six months. You plan to use the bonus to wipe out your $4,000 credit card debt. Instead of waiting for the bonus, you can pay off the balance with a new transfer card that charges 0% interest for six months. You won’t be charged any minimum payments during the six-month promotional period. If your minimum payment on the old card was $120, now you can save that amount each month instead. Over six months you could save a total of $720. Once you receive your bonus you would pay off the transfer card in full, before the 0% offer expires.
The Dangers of Using Balance Transfer Credit Cards
But if you’re not positive that you can pay off the full balance in time, don’t risk doing a balance transfer. When the music stops playing and the low rate ends, you might get stuck with a huge, double-digit interest rate on your debt, and few options to improve the situation. You could try to transfer the debt to another low-rate card right away. But if you’re not approved for one, all the savings you had hoped to gain from doing a balance transfer would be lost. You’d probably be worse off than if you hadn’t done a transfer in the first place.
Evaluate Balance Transfer Cards Carefully
Before you pull the trigger on doing a balance transfer, make sure that you understand all the card terms. Be extremely cautious; there are severe penalties buried in the fine print that can sneak up on you. For example, one late payment on most balance transfer cards results in a rate hike into the stratosphere. Many default rates can go as high as 29.99%! Yikes!
Here are six important features of transfer credit cards to evaluate:
The interest rate charged for transfers made during the promotional period
The interest rate charged after the promotional period. (That’s only important, of course, if you don’t pay off the card in full or if you plan to use the card afterwards.)
The duration of the low-rate promotional offer
The balance transfer fees
The annual card fee
Whether new charges and cash advances are included in the promotional rate
Here’s the quick and dirty tip: When choosing a transfer card, look for one with the lowest transfer fee and the lowest promotional rate that lasts the longest period of time with no annual fee.
I don’t recommend taking cash advances or making new purchases on a transfer card unless you’re 100% sure you’ll pay off the entire balance before the end of the offer. As I mentioned, it’s also important to be aware of the fees charged for late or missed payments in the event something unexpected happens, and paying off the card doesn’t go as you planned.
The Best Balance Transfer Credit Cards
I’ll give you the best offers that I’ve found based purely on their transfer offer. I’m assuming that you’d pay off the card in full before the promotion expires and not use it afterwards; so I’m not taking into account the terms of the card after the promotion expires. Don’t worry about writing them down--just go to the Money Girl section at quickanddirtytips.com where you’ll find the information in the show transcript. Take a look at the Discover® More Credit Card. It offers 0% interest for twelve months with a 5% transfer fee, and no annual fee. The Chase SlateSM with BlueprintSM Credit Card is also a good choice. It offers 0% interest for a term that ranges from 3 to 12 months, depending on your credit score, with a 3% transfer fee and no annual fee.
Also consider the following four cards that offer 0% interest for 6 months with a 3% transfer fee and no annual fee:
Card offers are always changing, so be sure to do current research on sites like balancetransfers.com, cardratings.com, and creditcards.com. To find out how much you could save by doing a transfer, there’s a great balance transfer calculator at creditcards.com.
Next week, I'll address canceling a credit card and whether or not it can hurt your credit score. The answer might surprise you. For another way to make credit cards work for you, and not the other way around, check out my episode on the best rewards credit cards.
I’m glad you’re listening. Chi-Ching, that's all for now, courtesy of Money Girl, your guide to a richer life.