Balance transfers are fantastic—IF you use them correctly. That’s a big ‘IF.’ These transfers move a balance from an interest-yielding card to a new card that offers an introductory interest rate as low as 0 percent for a certain time period.
That means you’re putting money toward your balance—not the pesky interest—over that period, for example, 6 or 12 months. You can even put more than one balance on a new card. This tactic can help you get out of debt quicker and save hundreds of dollars overall.
You MUST make up your mind to kill this debt before the carriage turns into a pumpkin or you’ll be S.O.L. and stuck with paying interest again. Download your free worksheet here to get started.
The Tale of Two Cards
In early 2015, I got my first balance transfer card, the Chase Slate. Chase paid Old Navy, making it seem as if I paid the card in full. Then I started paying Chase without worrying about interest. I killed that debt well before the April 2016 deadline with a huge medical bill reimbursement.
Transferring your balance won’t do you any good if you don’t pay it back in time.
I got a little happy and took advantage of another transfer offer in 2015. Well, it took advantage of me. Ha ha! Life happened. My paid-for, 2001 Mazda croaked the day before Thanksgiving that year. I got a new car—and the $250 monthly payments to go with it. That meant my huge payments to the balance transfer card stopped cold turkey (Pun unintended). Then, I started spending money to prepare for China.
I couldn’t pay the card off by November 2016 and have been getting hit with about $40 in interest each month ever since in addition to the $2,000-plus balance. IT SUCKS!
I’m unsure if I’ll ever get another transfer again, but if I do, I’ll heed these tips, make a concrete payback plan and stick to it come hell or high water.
What To Consider When Selecting A Balance Transfer Card
Bankrate.com is a great place to start comparing balance transfer cards. When you look around, check out these details:
- Purchase Annual Percentage Rate (APR) | Of course, you hope to qualify for a card at 0 percent by having a decent credit score. I’ve been told being in the 700 Club is good. I assume lenders don’t want to do business with you if you’re opening up cards left and right.
- Balance transfer APR | 0 percent, please!
- The expiration date for the teaser (introductory) rate | It could be 6 months, 12 months or longer. You don’t want to get caught up and not pay your balance within that timeframe like me. After that time’s up, the interest rate jumps up significantly. A card I once considered chose between 12.99 percent and 22.99 percent depending on the card applicant’s creditworthiness.
- Balance transfer fee | Some cards charge a percentage of the balance you wish to transfer to the new card. For example, if you have a 3 percent fee, you would pay $30 for a card with a $1,000 balance.
- The lender | While looking around, I noticed that you can’t get do a balance transfer within the same company. So example, you can’t dump debt from one Chase card onto a second Chase card.
- Savings from not paying interest | Using this balance transfer calculator, I estimated that I could save $762 in interest over the duration of the promotion. Seeing the amount of money you’ll save might give you extra motivation to pay off this card quicker.
- Impact on credit score | Your score might drop.
- Payback plan |This is the most important factor. Transferring your balance won’t do you any good if you don’t pay it back in time. Get it in your head right now that you won’t add more debt to this card and you’ll do whatever it takes to pay this card in full before the 0 percent promotion ends.
How Balance Transfers Affect Your Credit Score
If you plan to apply for credit such as a loan or mortgage in the near future, then some folks advise against doing a balance transfer. Why? A balance transfer could negatively impact credit scores in three ways.
- Debt utilization (30 percent of your FICO score) | You could max out the balance transfer card. The rule of thumb is to use 30 percent or less of a card’s credit limit. Maxing out at 100% is not good.
- Opening new credit (10 percent of your FICO score) | Opening new accounts could lower your score. Lenders don’t want to see that you apply for new credit often. That’s risky.
- Length of credit history (10 percent of your FICO score) | The longer you have a credit line, the better.
Please check out my comprehensive Balance Transfer Worksheet to (1) help you figure out if you want to get a balance transfer and (2) make a plan to pay it back before the low-interest rate period expires.
The Balance Transfer Worksheet includes:
- Spaces to write the most important information about your current credit card and the balance transfer card
- A payback plan
- A payback pledge you’ll sign to keep yourself accountable to the payback plan (The pledge is written in present tense to help you think about that glorious day you finally pay it off.)