Transferring the balance on your credit card to a new card with a lower (maybe even 0%) interest rate can be a big help when paying off debt if used correctly. By applying the money you can potentially save on interest to your balance to pay off debt faster.
What is a balance transfer?
It’s moving the balance on one credit card (or multiple cards) to another credit card. You still have the debt, you just owe it to someone else. So why move it? Usually to save money on interest with a lower interest rate. In addition, if you have trouble remembering to pay your bills on time, consolidating your debt to fewer cards can simplify the number of bills and due dates you’re managing.
Does everyone qualify for the low or 0% rate?
No, not everyone will qualify. For those who do, their rates and fees will vary based on their credit history.
Who is a balance transfer right for?
Anyone with a plan to pay down credit card debt can use a balance transfer as away to accelerate that plan and pay it down faster. If you’re paying a lot of interest on credit card debt, this may be something for you to consider. As long as you use the card appropriately, making payments on time and not adding to your balance, a balance transfer can can help you become debt-free faster. On its own, it has limited usefulness. It might buy you a few months of lower interest but that doesn’t actually reduce your debt and can lead to a worse situation later. If you qualify and are able to find a new credit card with the features listed below, and you plan to use it as a tool to pay off your debt faster, it may work for you.
- 0% or very low interest rate
- small or no balance transfer fee
- a credit limit that can cover the balance you want to transfer
- a grace period long enough to pay off the balance before the new rate kicks in
How do I start a credit card balance transfer?
You can start by checking with your current credit card companies to see if any of your current cards offer a balance transfer option or if they have a separate balance transfer card you qualify for. Either way, make sure you compare several offers to ensure you’re getting the one best suited for you. Once you decide on a card, you’ll complete an application. They’ll ask the typical questions about your income, check your credit and ask the name of your creditors and amounts of the balance(s) you want to transfer. If you qualify and get the card, you’ll continue to make payments on your old account until the new card issuer notifies you that the balance transfer has been completed. This could take a few days or weeks.
What should I do with the old card?
As for the old card, having several available sources of credit on your credit report generally is good for your credit score (the credit utilization ratio specifically), so it helps to keep the old account open after the transfer. But if that old card has an annual fee or it tempts you to continue spending, you’re better off closing it.
The last step is to follow through on your plan and pay down the balance you transfer. Don’t fall into the trap of feeling relief that your balance isn’t growing and stopping there. You’ve got a brief window to make a lot of progress – use it!
What’s the catch?
Here are the things to look for that can really cost you:
- Introductory interest rate
- Period of time introductory rate is available (grace period)
- Separate rate for new purchases
- Balance transfer fees
- Annual fees
- Post-introductory interest rate
The new card offers an introductory low interest rate for a short period of time known as a grace period, usually 6-18 months after you move your balance. This interest rate is typically just for the balance transfer amount meaning any new purchases you put on the card may earn interest at a different, higher rate.
And watch out for the fees. The balance transfer fee is usually around 3% of the total balance transferred. Just like any credit card, pay attention to any annual fees on the card. At the end of the grace period, there’s a new ongoing rate (you can’t stay at 0% forever) for the total balance on the card (the transferred balance and any new purchases). It could be as high, or higher, than the rate you moved away from – that’s one reason its so important to pay down the balance aggressively during the grace period.
How should I make the payments on the new card?
There are a couple more things to note about payments on these cards. Any late payment, or payment less than the minimum, can mean you lose your introductory rate and move you to a higher interest rate. Also, if you just make the minimum payment, it will be put towards the balance with the lowest interest rate, meaning it will go toward the balance you transferred onto the card if you’re still in the grace period.
Any payment above the minimum will go toward the balance with the highest interest rate. What that means is you must pay the minimum payment on the balance transfer AND pay off all new purchases every billing period in order to not pay interest during the grace period. If you only pay the minimums every month you could be paying down the 0% interest debt while new purchases are accruing much, much higher interest.
What’s the bottom line?
Balance transfers come with some complicated rules and fine print that you need to understand to avoid costly mistakes. If you are considering making a balance transfer to pay off credit card debt, login to chat with a BrightDime coach to see if it makes sense for your situation.