Credit card debt can be anxiety-inducing. Often, consumers consider using a balance transfer credit card to take advantage of the introductory interest rate and pay off their debt.
While a zero percent balance transfer sounds like a great idea, there are a few things to watch out for when considering a balance transfer credit card.
So, if you’re interested in moving your debt from one credit card account to another, here’s what you need to know.
How Balance Transfer Credit Cards Work
Each credit card may have different requirements, but here are the steps you typically take when doing a balance transfer with a credit card:
- Apply for a card – The first step is to apply for a balance transfer credit card. You should do plenty of research before applying to be sure that you understand the interest rate, promotional period, and what credit score you need to have to apply. Some transfers will not be allowed, so make sure that you will be able to make a transfer from your current card to the prospective card.
- Do the balance transfer – Once you have your new credit card, you will need to initiate the transfer. You can typically do this online but may also want to do it over the phone. You will go to the website or call your new issuer and provide the former issuer name, amount of debt, and other account information that you want to transfer over.
- Wait for the transfer to go through – The balance transfer approval may take up to a couple of weeks. The new issuer will typically automatically pay off your old account. The old balance and any fees will then show up in your new account.
- Pay off the balance – Now that your debt is all on your new card, you will need to make at least monthly payments on that account. If you pay it off completely within the new 0% APR period, you will save a lot of money on interest because interest is not accruing during that time.
Why Balance Transfers are a Good Idea
Balance transfers can be very helpful in several situations. Typically, people who want to get rid of their credit card debt quickly use balance transfers to help them avoid making interest payments. Here are a handful of situations in which a balance transfer is a good idea:
You Need More Time to Pay Off Your Balance
Usually, balance transfer credit cards offer 0% APR or annual percentage rating for several months after opening the card. This period differs by card but is typically six months to a year, although some offer longer promotional periods. If you have credit card debt and want to stop paying interest, you may want to use your balance transfer credit card to pay only the balance without having to worry about accruing interest.
You Want to Avoid Interest Rates
If your current credit card or cards have very high interest rates, you may want to do a balance transfer to a card with a lower interest rate. Of course, the promotional period will not have any interest, but you may want to choose a card that has a lower interest rate after the promotional period ends.
This might be an especially good reason for someone with multiple credit cards to use a balance transfer credit card. You can simplify your payments to one card that has a lower overall interest rate.
You Want to Earn Rewards Like Points or Miles
If you find a balance transfer credit card that has better perks than your current one, you may want to consider making the switch. Many cards have cash back rewards or allow users to earn points toward travel. This can be an attractive offer for someone who would use the perks but does not have them on their current card.
You Want to Consolidate
Making monthly payments on multiple cards can be confusing. By consolidating your credit card debt to one card, you can simplify your monthly payments. You can also make the payment process easier on yourself while potentially getting a lower interest rate overall.
You Want to Improve Your Credit Score
There are several ways to improve your credit score. The rule of thumb is that you should use less than a third of the total credit available to you and make regular payments toward your debt. If you are consolidating multiple cards to one balance transfer credit card, you can make steady payments in one place, thus increasing your chances of making regular payments.
Additionally, you can increase the balance allowance while paying down your debt so that you use less than a third of what is available to you.
Important Things to Remember
You should keep the following things in mind when considering a balance transfer credit card:
Balance Transfer Fee
Many balance transfer credit cards have a balance transfer fee. This is typically around 2-3% of the total amount you transfer to the card. Be sure that this makes financial sense for you before making a transfer.
If you plan to transfer a large amount or several cards to one card, be sure your balance transfer credit card does not have a transfer limit. This will help to protect you from a complicated debt repayment situation.
Not Always A Better Interest Rate or Promotional Period
You may have a high balance on a credit card with a low interest rate. If this is the case, do not transfer your balance to a card with a higher interest rate unless you are sure you can pay it off during the promotional period.
You Could Hurt Your Credit Score
Opening a new credit card could negatively impact your credit score. You should evaluate if this hit is worth it for you. Keep in mind that your score might go up again if you’re approved for a new card because your total available credit might increase. This depends on your debt, how much credit you’re approved for, and whether or not all your debt is on one card.
You May Not Be Eligible
Not everyone is eligible to do balance transfers, and you may not be eligible for every card you research. Be sure to keep this in mind when you investigate the terms and conditions of your balance transfer credit card.
The Bottom Line
There are several balance transfer credit cards available. You should do your research to see which interest rate, promotional period, and other perks are best for you before deciding which card to use.
By using a balance transfer credit card, you may be able to pay off your debt faster and avoid paying outrageous amounts of interest. Then, instead of making payments toward your debt, you can use the money to meet your other financial goals in the future.