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The Ultimate Guide to Using a Balance Transfer Credit Card

Ever wonder if using a balance transfer offer could improve your personal finances? Laura explains in plain English how a balance transfer credit card works, how it affects your credit, and when it makes sense to use one. You’ll learn smart tips to cut your interest expense, save money, and get out of debt faster.

By
Laura Adams, MBA,
Episode #486
Your Guide to Using a Balance Transfer Credit Card

If you’ve ever received a balance transfer credit card offer through the mail or online, you may have wondered if it could help or hurt your finances. These promotional offers come with fine print that can be tricky to understand, especially for first-timers.

In this post, I’ll explain in plain English how a balance transfer credit card works, how it affects your credit, and when it makes sense to use one. You’ll learn smart tips to cut your interest expense, save money, and get out of debt faster.

What Is a Balance Transfer Credit Card?

A balance transfer credit card is just like a regular credit card, except that it includes an incentive to transfer balances from other accounts and pay no or lower interest rates on debt for a period of time. You can move just about any type of debt—such as a balance on a different credit card, a personal loan, or a car loan—to a balance transfer card.

Every balance transfer offer is different, but the longer the promotional period the better. The most common promotions are an annual percentage rate (APR) of 0% during that introductory period. That means you don’t accrue one penny of interest until after the promotion expires.

Every balance transfer offer is different, but the longer the promotional period the better.

Card issuers offer these terrific deals as an incentive for you to do more business with them. I’ve used many balance transfer offers and they can be a smart way to cut your interest temporarily and save money.

Let’s say you have a $5,000 balance on a card charging 22% interest and move it to a card that charges 0% for the first 12 months. You’d save about $875 during the promotional period, which could go toward paying off your balance. That helps reduce the time it takes to get out of debt.

But as I mentioned, after the music stops playing and the introductory rate ends, you’ll be charged a standard APR. It could be higher or lower than your previous rate before doing a transfer. So be sure you understand exactly what happens when the promotion ends.

See also: How Many Credit Cards Should You Have for Good Credit?

Another charge to be aware of is called a balance transfer fee. It’s a one-time fee for any amounts you transfer, and general ranges from 3% to 5%. For example, if you transfer $1,000 to a card with a 3% transfer fee, you’ll be charged $30, which increases your debt to $1,030.

However, some cards offer a 0% fee if you complete a transfer during a limited period, such as within 60 days of opening a new account. I received a question from Lorna S. about this benefit, who said:

Thank you so much for your Money Girl podcasts, which are helping me conquer my fear of money. I’m about to transfer my credit card balance to a 0% interest rate card, however there’s something I don’t understand. It says there is no introductory balance transfer fee for transfers made during the first 60 days of opening the account. What happens after 60 days?

Lorna, if you miss that incentive you can still make a transfer after 60 days, but a fee would apply then. So be sure to take advantage of a no-fee offer if you see one and know that doing a balance transfer is right for you.

Another point to remember is that just because a card advertises 0% interest for 24 months doesn’t mean that you’re guaranteed to qualify for those exact terms. You could be offered a shorter promotional period. Or you may not be able to transfer as much debt as you’d like.

Just like with a regular credit card, transfer deals come with a credit limit. So, if you have $6,000 of debt, but get approved for a $2,000 credit limit, you’ll only be able to move $2,000, including any transfer fee, to take advantage of the deal.

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Just like with a regular credit card, transfer deals come with a credit limit. So, if you have $6,000 of debt, but get approved for a $2,000 credit limit, you’ll only be able to move $2,000, including any transfer fee, to take advantage of the deal.

How Does a Balance Transfer Credit Card Work?

Once approved, most cards give you the option to have your transfer deposited into your bank account so you can send the funds to your creditors. Or they may require that you complete an online form indicating who you want to pay, your account number, and the amount, and then send the funds on your behalf. You may have the choice of either option and both typically take about a week to process.

Even during the promotional period, you must make monthly minimum payments on time, otherwise the consequences are harsh. Just one missed due date means a sweet 0% interest deal could be ripped out from under you and replaced with a default APR as high as 30%! That could easily wipe out any benefits you hoped to get by doing a balance transfer in the first place.

The 0% APR applied to a balance transfer isn’t the same rate you’re charged for new purchases on the card. In most cases, regular purchases are charged the standard APR, which will be much higher.

See also: 5 Lesser-Known Reasons Why Your Credit Score Drops

How Does Using a Balance Transfer Card Affect Your Credit?

A common question about doing a balance transfer is how will it affect my credit? One of the most important factors that determines credit scores is called the credit utilization ratio. It’s the amount of debt you have on revolving accounts (such as credit cards and lines of credit) divided by your available credit.

For instance, if you have $2,000 in debt and $8,000 in available credit, you’re using one quarter of your limit and have a 25% credit utilization ratio. It’s calculated for each of your revolving accounts as well as an aggregate on all of them.  

Using about 20% to 25% of your available credit is the sweet spot recommended for building and maintaining optimal scores. Having a low utilization shows that you can use credit responsibly without maxing out your accounts.

Getting a new balance transfer card, or an additional limit on an existing card, instantly raises your available credit, which lowers your credit utilization, and boosts your scores. Likewise, the opposite is true when you close a card.

Canceling a credit card after transferring the entire balance may seem like a good way to clean up your financial life; however, it comes with unintended consequences. One is that you instantly have less available credit, which spikes your utilization ratio and causes your scores to drop.

Getting a new balance transfer card, or an additional limit on an existing card, instantly raises your available credit, which lowers your credit utilization, and boosts your scores. Likewise, the opposite is true when you close a card.

Another strike against closing a credit card is that it eventually decreases the overall age of your credit history, which is an important factor in your scores. Instead of canceling a paid-off card (especially one you’ve had for a long time), make a strategic decision to file it away or use it sparingly for purchases you can pay off in full each month.

See also: 8 Credit Card FAQs and Tips to Build Credit

Another factor that plays a small role in your credit scores is the number of recent inquiries for new credit. So, applying for a new balance transfer card typically causes a small, short-term dip in your credit.

Additionally, having a mix of both installment loans and revolving accounts plays a relatively small role in boosting your credit. Therefore, paying off a loan by transferring the entire balance to a transfer card could have a slightly negative effect, especially if it’s your only installment account.

However, the ding for closing a loan would likely balance out the positive effect of getting more available credit on a balance transfer card. The bottom line is that if you don’t close a card after transferring a balance to a new account, and you don’t apply for other new accounts around the same time, the net effect should raise your credit.

Unless you have a big purchase planned for the near future, such as buying a home or car, I wouldn’t let the short-term implications of doing a balance transfer worry you. Instead, focus on how to leverage it to save money and improve your finances in the long run.

See also: 5 Ways to Get a Loan With Bad Credit

The Best Strategy for Using a Balance Transfer Credit Card

Before pulling the trigger on a no-interest transfer offer, have a strategy to pay off the balance before the promotional period expires and stick to it. Here’s an example of a situation where doing a balance transfer makes sense:

Let’s say you’re having a good year at work and are going to get 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 pay off the credit card debt with a transfer card that charges 0% interest for six months. Once you receive your bonus you would pay off the transfer card in full, before the 0% interest offer expires.

But if you’re not positive that you can pay off the full amount in time, don’t risk doing a balance transfer. When the music stops playing and the promotional period ends, you might get stuck with a higher interest rate than you started with. That's why it's important to know what the card's regular interest rate will be after the promotion.

Another way to tackle a balance transfer is to divide your balance by the number of months you’re interest free. For instance, if you get a 12-month 0% APR offer and transfer $6,000, pay 1/12 or a minimum of $500 to per month to wipe it out on time so don’t get hit with a higher interest rate.

Shifting a high-interest balance to a low or no-interest card is a smart way to save interest. It obviously doesn’t make the balance go away, but can make it much less expensive for a limited time.

Shifting a high-interest balance to a low or no-interest card is a smart way to save interest. It obviously doesn’t make the balance go away, but can make it much less expensive for a limited time.

If you can save money despite any transfer fees, you’ll come out ahead. And if you plow your interest savings back into your debt, instead of spending it, you can pay off your balances even faster.

Stay aggressive with a plan to get rid of your most expensive balances and cut back on making new card charges that you can’t pay off in full. Don’t let a balance transfer just be an excuse to keep your debt even longer.

Make a goal to use credit cards for convenience, rewards, and to build credit—not to carry balances indefinitely from month to month. That way you get the best out of your cards instead of them getting the best of you!

If you need help crunching the numbers try out the Balance Transfer Calculator at Bankrate.com or the debt calculators at Dinkytown.com.

See also: How to Build Credit With a Secured Credit Card

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About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a trusted and frequent source for the national media. Her book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show. 

 

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