If you’re juggling multiple loan payments each month and it seems like the principal never shrinks, a balance transfer might sound like a good idea. You could save time and make managing the debt easier by consolidating several credit card balances onto one credit card. With a promotional zero-percent interest rate offer, you could also save money and pay down debt quicker. This is a great strategy for many consumers, but there are also disadvantages and pitfalls that you need to be familiar with. Let’s take a closer look at how balance transfers work and what you need to keep in mind when evaluating if they are a good idea for your financial situation.
How Does a Balance Transfer Work?
When you make a balance transfer request between credit cards, you’re essentially paying one card’s debt with another card. You can make the request online, over the phone, or by using a balance transfer check.
Some credit cards are categorized as balance transfer cards because they offer low interest rates on the balances you move to the card. For example, at the time of writing this article, the Citi Simplicity credit card is offering zero-percent interest on balance transfers and purchases for 21 months. If you can pay off the debt within the promotional period, you won’t accumulate interest. In most cases, a balance transfer involves opening a new card in this manner, but it can also be done with a card you already have. Your credit card company may periodically send you balance transfer checks (along with a lot of fine print). Our discussion here will focus primarily on opening a new card for balance transfers.
Things to Consider Before Applying for a Balance Transfer Card
A balance transfer could be a good time- and money-saving idea, but there are different factors to consider when comparing balance transfer offers. Some may vary based on the card or issuer, while others are based on your credit or financial situation.
- Balance Transfer Fees. Many balance transfer cards charge a fee, often three or five percent of the amount you transfer. There may be a minimum fee as well, usually $5 or $10, which could offset the potential savings of a small balance transfer.
- The Promotional Period. The length of your promotional offer can range widely. Some cards offer 12 months or less of zero-percent APR, others offer up to 24 months. Consider the monthly payments you’ll need to make to pay off the debt before the promotional period ends when comparing offers.
- A Different Promotional Rate or Period for Purchases. This is incredibly important, and something you might not catch in the fine print: Some balance transfer cards have a zero-percent promotional rate for balance transfers, but not for purchases. Or, they may have a shorter promotional period for purchases than balance transfers.
- The Transfer Limit. You might not be able to transfer all your debts to your new balance transfer credit card. The card’s issuer determines how much debt they’ll let you transfer, which may be determined by your credit limit, a percentage of your credit limit, or a particular dollar amount.
You may find a few cards that waive their balance transfer fee, such as the Chase Slate card (again at the time of publishing this piece), but the trade-off could be a shorter promotional period. Compare the cost savings that comes with avoiding a fee to the higher monthly payment you may need to make to pay off the debt within the promotional period.
If you have a balance on your card, including a balance you transferred, you may start to accrue interest on purchases that aren’t covered by a promotional rate as soon as the purchase is processed. When a card has varying periods, or doesn’t have a promotional rate for purchases, you might not want to make purchases while you’re paying down the debt. In other words, you would just use the card to execute your debt repayment strategy, and you’d need another card (or cash/debit card) for making day-to-day purchases.
Here’s an explanation from a policy on one of Discover’s cards:
There is no grace period on your balance transfers. If you take advantage of this balance transfer offer, you will be charged interest on purchases unless your purchase APR is at a promotional 0% APR. To avoid interest on new purchases after you transfer a balance, you must pay all balances on your account, including any balances you transfer under this offer, in full by the first payment due date.
What complicates matters even further is that if you have a purchase balance and a transferred balance, you may have less control over how to pay off your total debt. Your creditor will decide in which order your debt is repaid, and this may not work out in your favor. Again, it’s likely a good idea to avoid using your balance transfer card for any purchases, at least until the balance that was transferred is paid off.
If you’re transferring to a card you already have and the total of your balance transfer request plus the current balance on your card exceeds the limit, the issuer might deny or only partially fund your transfer.
Unfortunately, if you’re applying for a new balance transfer card, you won’t know your credit or transfer limit until after you are approved. However, it may be based on your creditworthiness and financial situation. If you have poor credit and a low income, your limit might be just a few hundred dollars.
What Could Go Wrong?
As with many financial contracts, there’s fine print to consider before applying for a balance transfer card. Consider what could go wrong, how to prevent it, and how it might affect your finances or personal life.
- You Could Rack Up More Debt. Some people find themselves in credit card debt because they use credit cards for non-essential purchases without a plan to pay the bill. Once the balances are transferred to a new credit card, you might find yourself tempted to use the other cards again. Without caution and restraint, you could wind up digger yourself into deeper debt.
- You Don’t Complete the Transfer Quickly. In order to receive the promotional rate or waived balance-transfer fee, you may need to request or complete balance transfers soon after opening your account. Depending on the card and offer, you may have only 30 days or over three months.
- They Can Take a Few Weeks to Process. Balance transfers can take several weeks to process. You might miss out on the introductory rate if you make the request near the end of the allotted time and the offer requires transfers be completed within the period.
- Accidental Late Payments. Because the process can take several weeks, you should continue to make payments on a card until your transfer is completed. Otherwise, you might accidentally miss a payment, get charged a late-payment fee, and get a negative mark on your credit reports.
- You Can’t Transfer Debt from the Same Creditor. Often you can’t transfer debt to a balance transfer card if it’s already owed to the same issuer or its affiliates. For example, you can’t transfer a balance from a Chase Freedom card to a Chase Slate card.
- The Standard Interest Rates Could Be High. Once your promotional period ends, the interest rate for your purchases and balance transfers reverts back to the standard rate. This may be higher than your current card’s interest rate.
Is a Balance Transfer Right for You?
A balance transfer could be a good idea, particularly for those that are able to transfer high-interest debts to a card with 0-percent APR offer and pay off the debt before the promotional period ends. However, balance transfers aren’t the only way consolidate debt or save money by lowering your interest rates.
Some banks, credit unions, and online lenders offer unsecured personal loans. You could borrow the money and pay off your credit cards without having to deal with another revolving credit account. Depending on how much you need to borrow, this may only be an option if you have excellent credit and a high income. Even then, you likely won’t receive a zero-percent interest rate offer with a personal loan.
You may find it easier to follow through with the personal loan route because you’ll have a set monthly payment with a clear payoff date.
If you have poor credit and won’t qualify for a personal loan or balance transfer (at least not with favorable rates or limits), you could take out a secured loan using a home or vehicle as collateral. Many consumers pursue these types of secured debt consolidation, but don’t fully understand the risk. These lending products put your property at risk if you’re unable to make payments in the future, and for that reason many financial experts, including those at Clearpoint strongly advise you to think of them as last resorts.
Another option is to create and follow a debt management program. By working with a credit counselor, you may be able to negotiate lower interest rates on your debts. With the plan, you’ll make a single payment to the counselor’s agency, which will then distribute the money to each creditor.