The smartest way to use a credit card is to pay off your statement balance in full by the due date every month. This good habit can help you in two important ways. When you avoid revolving a balance from month to month you can protect your credit score and steer clear of high-cost interest charges.
Nonetheless, credit card debt is a reality many Americans face. The average credit card balance increased to $5,910 in 2022, according to Experian. And when you consider the fact that credit card interest rates have steadily increased in recent months, many consumers may find it increasingly difficult to pay off what they owe on their credit cards.
Balance transfer credit cards are one option that can help you reduce the amount of interest you pay while you work to reduce your credit card debt. Yet there are benefits and drawbacks to this debt reduction strategy you’ll want to consider before you move forward.
What is a balance transfer card?
A balance transfer credit card is a type of credit card account that offers a low or 0% introductory APR on balance transfers for a specified period of time. If a card issuer approves you for a balance transfer card, you should be able to use your new account to pay off debt you owe to another credit card company.
A balance transfer credit card doesn’t wipe out your existing credit card debt, but reduces the interest rate you were paying on your credit card debt, albeit on a temporary basis. By reducing the interest rate, you may be able to make more headway toward paying down what you owe since more of your payment will go toward the principal of the debt rather than the principal plus interest charges.
It’s important to point out that in order to get out of debt, you shouldn’t use a balance transfer card for new purchases. Nor should you start racking up more debt on the card from which you transferred the balance. Additionally, most credit card issuers charge a balance transfer fee (often 3% to 5% of the amount you transfer). This added cost may offset some of your savings potential.
Pros of a balance transfer card
- 0% interest rate: Perhaps the biggest appeal of a balance transfer credit card is the opportunity to take advantage of a 0% introductory APR offer. If you qualify for a balance transfer with 0% APR, all of your monthly payment goes toward your account balance rather than a portion of it going toward interest charges.
- Consolidate payments: A new balance transfer card could help you consolidate the balances on multiple accounts. If you can use a balance transfer to pay off multiple credit cards, it could make managing your monthly payments easier.
- Potential credit score improvement. Using a balance transfer card might improve your credit score in two ways. First, if a balance transfer card lowers your overall credit utilization ratio (how much you owe relative to your credit limits), your credit score might benefit. If you consolidate multiple credit card debts with your new balance transfer card, reducing the number of accounts with balances on your credit report might have a positive impact on your credit score as well.
Cons of a balance transfer card
- Good credit required: In many cases you need good to excellent credit to qualify for a balance transfer credit card offer. So, you might need to fix and repair bad credit before you’ll be eligible for a balance transfer card if you’re facing credit problems.
- Balance transfer fee: Most credit card issuers charge a balance transfer fee, often between 3%-5% of each amount you transfer to your new account. For example, if you transfer $10,000 to an account with a 5% balance transfer fee, $500 will be added to the amount transferred.
- Promotional APRs expire: The introductory APR a credit card issuer offers you with a new balance transfer credit card will only last for a limited time. Once the promotional period ends, any balance remaining will be subject to your balance transfer card’s ongoing APR.
- You can’t transfer balances with the same issuer. For example, you can’t transfer a balance from a Citi credit card to a Citi balance transfer card.
How to use your balance transfer card
Once you qualify for a credit card with a 0% APR balance transfer offer, your next step is to figure out how much debt you want to move to your new account. To answer this question, you’ll need to know the credit limit on your new account and the balance transfer fee.
Let’s say your new account has a $20,000 limit and the card issuer charges a 3% balance transfer fee. You won’t be able to transfer a full $20,000 in debt to the new account because the balance transfer fee counts toward your credit limit. Yet depending on the card issuer’s terms, you may be able to transfer a little over $19,400 since that would still leave room for the $582 balance transfer fee (3% of $19,400).
As far as processing a balance transfer (or transfers), your new credit card company might supply you with checks you can use to pay off your existing credit card issuers. Other credit card companies might ask you to provide account information for the credit cards you wish to pay off so they can process your balance transfer(s) electronically.
It’s critical to continue to pay at least the minimum amount due on your old accounts until the balance transfer payment goes through to avoid any late payments. According to credit bureau Experian, a balance transfer can take just a few days to several weeks, depending on the credit card issuer. So continue checking the balance and payment due dates on your old accounts until they show a $0 balance.
Why transfer balances
For many people, the chief motivation behind a balance transfer is the desire to save money and get out of debt faster. With high interest charges assessed on a revolving balance, that makes it more difficult — and more expensive — to pay off what you owe.
The average interest rate on credit cards (for interest-assessing accounts) rose to 20.40% in the fourth quarter of 2022 according to the Federal Reserve. Therefore, if you’re revolving a balance month to month, it’s important to find ways to lower your credit card interest rate and reduce your debt as quickly as possible.
Other people may choose to transfer balances to try to improve their credit score. A balance transfer isn’t guaranteed to boost your credit score, but there might be a positive credit impact if the balance transfer reduces your credit utilization rate on other credit cards and the number of accounts with outstanding balances on your credit report.
Better credit has the ability to save you money on many different types of financing, from credit cards and mortgages to auto loans and personal loans. You might even qualify for lower insurance premiums when you have good credit depending on your state of residence. So, any action you can take with the potential to improve your credit may be worth considering.
Is a balance transfer worth it?
Credit card interest rates are notoriously high. And with recent interest rates increases in response to inflation, credit card APRs have only gotten worse.
Despite the standard 3% to 5% fee, a balance transfer is usually worth thinking about if you can qualify for a new credit card with a 0% introductory rate offer for a period of a year or more. However, you should always do the math to make sure a balance transfer will save you money when you factor in the added cost of the balance transfer fee.
It’s also essential to have a budget in place and a plan to avoid future overspending when you use a balance transfer card to pay down your debt. If you make the mistake of running up a new debt on your credit cards after you consolidate them, you could create bigger financial problems for yourself down the road.
Frequently asked questions (FAQs)
Opening a new balance transfer card could impact your credit in positive and negative ways. On a positive note, a balance transfer may reduce your overall credit utilization rate. Credit utilization is a major factor in the “amounts owed” category of your credit report that influences 30% of your FICO® Score. A balance transfer might also help your credit score by reducing the number of accounts with balances on your credit report.
On a negative note, a new credit card may reduce the average age of accounts on your credit report. Length of credit history is worth 15% of your FICO Score. The older the accounts are that appear on your credit report, the better. Applying for new credit may also result in a hard inquiry on your credit report that could have a slight negative credit score impact for a year.
Despite the possible credit score fluctuations that may happen after applying for a balance transfer card, know that getting out of debt and saving money are more important than your credit score in the long run.
If you transferred the full balance from your original account over to your new balance transfer credit card, the original account should update to reflect a zero balance on your credit report.
In the event you no longer plan to use the original account, consider setting up a small, recurring subscription on the card (like a streaming service) to keep the account active. From there you can schedule automatic payments to make sure you pay your old credit card on time and in full each month.
This strategy should help make sure the old credit card remains open and active so you can keep positive credit history on your credit reports. Unless the card is causing you financial problems (such as a high annual fee), it’s usually best to avoid closing your old credit card. Canceling a long-held credit card has the potential to hurt your credit score by reducing your overall age of accounts.
You should not lose any rewards or cash back you earned on your old account by participating in a balance transfer offer as long as you keep the old account open. But if you close the account after you transfer the balance, you will most likely lose your rewards unless they have been transferred to another loyalty account, such as an airline card where any miles or points earned are held in your airline loyalty account.
There’s no universal rule regarding how often you should use balance transfers. If you have a lot of debt and it’s going to take you some time to pay it down, multiple balance transfers might make sense. But if you keep seeking out balance transfers due to overspending, you probably need to look at your budget and address the root of your credit card debt issues first.
It’s also worth noting that some credit card issuers may limit the number of balance transfers you can request on an individual account. Such restrictions could have an impact on your long term debt consolidation strategy as well.
