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Overwhelmed by credit card debt? You’re not alone. Credit card debt is at a record high as millions of Americans struggle to keep up with high interest rates.
Credit card debt can hinder your financial freedom and cause stress in your daily life. But there’s a tool that can help you regain control of your finances and save thousands of dollars in the process: a balance transfer credit card.
Balance transfer cards can help you save money and consolidate debt, making managing and paying off your outstanding balances easier.
How do balance transfers work?
Balance transfer credit cards allow you to transfer existing debt from one (or more) high-interest credit cards to a new card with a low or 0% introductory interest rate.
Once a balance transfer is complete, you’ll be responsible for making payments on the new card. You’ll also have to pay a balance transfer fee of 3%-5% of the total amount you’re transferring.
During the promotional period (typically 12-21 months), you can focus on paying off the transferred balance without accruing more interest.
Imagine your credit card debt as a boiling pot of water, says Jeff Rose, certified financial planner and founder of Good Financial Cents, and your current high interest rate is the flame that keeps it hot.
“A balance transfer card is like moving that pot to a cooler part of the stove where the flame is much lower or even turned off for a while,” Rose says. “This gives you a chance to handle the pot without getting burned by the high interest and allows you to pour the water, or pay off the debt, more easily.”
In other words, a balance transfer card buys you time to pay off your credit card debt. But once the promotional period ends, you’ll be charged your card’s regular APR on the remaining balance.
That’s why it’s essential to devise a realistic plan to pay off your debt before the introductory period ends.
How a balance transfer credit card saves you money
Balance transfer credit cards can help you save a ton of money on interest charges.
By transferring your existing debt to a card with a low or even 0% interest rate, more of your monthly payment goes to paying off the actual debt rather than interest. This way, you can pay off your debt faster and keep more money in your pocket.
Assume you have $5,000 in credit card debt with an APR of 20.6% (the average in August 2023). Your unpaid balance will accrue $85.35 in interest each 30-day statement cycle, adding to over $1,000 in interest charges each year.
Let’s say you transferred that $5,000 debt to a balance transfer card with a 0% APR for the first 18 months and a 3% balance transfer fee. While you’d pay $150 in fees, if you paid off your debt within 18 months, you’d pay no other interest charges and save more money.
Dealing with many credit cards can take time and effort. Consolidating your debts onto one card means you’ll only make one monthly payment, making tracking and managing your finances more manageable.
“By consolidating multiple debts into one payment,” says Rose, “you can simplify your financial management and achieve a streamlined path towards becoming debt-free.”
Managing a balance transfer credit card can also positively impact your credit score. Making regular, on-time payments shows responsible credit behavior and can boost your score.
Pitfalls to avoid when using a balance transfer credit card
All good things must come to an end — including the attractive 0% or low interest rate offered by balance transfer credit cards.
Once this period ends, the card’s interest rate may increase significantly. If you’re unable to pay off the balance before this happens, you may pay higher interest rates, says Rose.
When you transfer your existing balances to a new credit card, it might be tempting to start using your old cards again. If you’re not careful, this can lead to even more debt and financial stress.
Balance transfer credit cards also come with transfer fees, charged as a percentage of the total transferred amount. While the interest savings often outweigh the fee, consider this cost when deciding if a balance transfer is right for you.
Applying for a new credit card also requires a hard credit pull, which can temporarily hurt your credit score. But keep in mind the potential dent to your score won’t be critical or last long.
Choosing the right balance transfer card
Before you shop for the right balance transfer card, review your existing credit card debt, including the interest rates and any fees. This will help determine the amount you want to transfer, as you can’t transfer a balance higher than your new credit line.
Here are some factors to consider when choosing a balance transfer card:
- Low or 0% introductory APR: This is the most important feature of a balance transfer card. Aim for a card with an introductory APR for an extended period, which gives you more time to pay off your debt.
- Regular APR: Ideally, you’ll pay off your debt before the promotional period ends, but it’s still important to review the card’s regular variable APR.
- Transfer fees: Review how much the card will charge to complete a balance transfer. Look for cards with lower or waived transfer fees to minimize the financial impact.
- Credit limit and eligibility: The credit limit on the balance transfer card should be high enough to accommodate your transferred balance. Also, review the eligibility requirements, like credit score, to ensure you can get approved.
Taking the time to research and compare options will increase your chances of finding the right balance transfer card.
How to do a balance transfer
Once you’ve picked a balance transfer credit card, here’s how to complete the balance transfer:
- Apply for the balance transfer card. If approved, you’ll receive the new credit card.
- Initiate the transfer. This is a straightforward process, done online or over the phone, depending on the issuer.
- Confirm the transfer: Once the balance transfer is complete, verify the balances successfully moved from your old credit cards to your new one.
- Additional tips to remember: Same-issuer transfers are generally unavailable. For example, you usually can’t transfer your balance from a Chase credit card to a Chase balance transfer card.
Making the most of your balance transfer
Getting a balance transfer credit card is just the first step — you still have to pay off your debt. That’s why it’s critical to make a repayment plan and budget to maximize your budget transfer, says Rose.
Here are some tips to maximize your balance transfer:
- Take advantage of the promotional period: We mentioned this before, but it bears repeating. Since interest won’t accumulate, you can make significant progress toward debt-free.
- Create a plan: Use this calculator to figure out how long it will take you to pay off your debt using a balance transfer card. Set a realistic monthly amount to put towards your debt.
- Avoid new purchases: The promotional interest rates on your balance transfer card usually apply only to the transferred balance, not new charges.
- Build healthy habits: Create a budget, cut unnecessary expenses, and find ways to increase your income. Adopting smart money habits can set a strong foundation for your overall financial well-being.
- Track your progress: Monitor your remaining balance, the time left in the promotional period, and the amount you’ve paid off.
Remember, small steps each month can lead to significant results over time.
Bottom line
Using a balance transfer card to save on debt payments can significantly benefit your financial health. Consolidating your debt can also simplify your budgeting and make it easier to get out of debt.
Keep in mind this path requires discipline and careful planning. Make sure to evaluate your financial and credit situation before making the move. And once you do, stay the course and avoid making large purchases until you’ve repaid your debt.
Opinions expressed are author’s alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.