If you have a high balance on one or more credit cards, an option that could save you money is getting a balance transfer credit card with a lower interest rate. You’ll likely need a good or excellent credit score to qualify for the best deals, but balance transfer credit cards can have introductory annual percentage rates (APRs) as low as 0 percent.
Here’s what you need to know about these credit cards and potential pitfalls that come with them.
How a Balance Transfer Credit Card Works
With a balance transfer, you’re essentially paying one credit card with another. Although many credit cards have this feature, there are some that are specifically known as balance transfer credit cards because they have lower fees and introductory APRs.
The point of a balance transfer is to pay less in interest. Let’s say that you have a balance of $10,000 on one of your credit cards with an APR of 18.99 percent. That could cost you $1,000 to $2,000 in interest if you take a year to pay it off, depending on how much you pay every month.
So, you apply for a credit card with an introductory APR of 0 percent for the first 12 months. If you pay that balance off within a year, you’re now paying nothing in interest.
There are several credit cards that offer 0-percent APRs on balance transfers for a certain amount of time. That time period could be just a few months, or it could be 21 months with the Citi Simplicity card, for example.
When you look for a balance transfer credit card with a 0-percent APR, make sure that the APR applies for balance transfers. Some credit cards only offer a 0-percent APR on purchases and have a separate APR for balance transfers. If you have multiple credit card balances to transfer, you also need to verify that each one will qualify for the introductory APR.
Balance Transfer Fees
There is a balance transfer fee that accompanies every balance transfer you make, and again, this varies depending on the card. Note that you pay the balance transfer fee for the card that’s receiving the balance, not the card with the balance you’re paying off.
Balance transfer fees are typically around 3 to 5 percent, but you may be able to find a better deal. The Barclaycard Ring MasterCard, for example, is one such option, as it has no balance transfer fees and a 12-month introductory period with 0-percent APR.
If you can’t qualify for a card without balance transfer fees, then you’ll need to weigh the cost of the balance transfer against how much money you can potentially save in interest payments.
Potential Risks of a Balance Transfer
Although a balance transfer can be useful, it can end up costing you money if you’re not careful. There are two common ways that you can end up in trouble after transferring a balance.
The first is if you miss a payment. Even if you’re just a day late, many card issuers include in their cardholder agreements that missing a payment nullifies your promotional APR. This means that you’ll go from that 0-percent APR to whatever the standard APR on the card is, making the balance transfer a waste of time and money.
If you fail to make a payment for 60 days, the card issuer may charge you a penalty APR, which is much higher than the standard APR would be. Making your minimum payment by the due date is always important with a credit card, but it’s even more important when you have a 0-percent APR.
Not Paying the Entire Balance
The second potential problem is not paying your entire balance before the introductory period ends. The day after your introductory period, the card issuer will begin charging you interest on your balance. For this reason, it’s crucial that you have a plan in mind to pay off your balance in full before the introductory period ends. Don’t just make the minimum payment, as you could end up in the same position you were before.
Is a Balance Transfer Credit Card Right for You?
If you’re struggling with credit card debt but you still have a good-enough credit score to qualify for the best balance transfer card offers, then it’s worth applying to potentially save yourself some money.
Just remember that although a balance transfer credit card can help you, it’s not a solution to the real problem. Credit card debt is a symptom of poor budgeting and spending habits. Before you think about transferring your balances, you should focus on putting together a budget and only spending within your means. Otherwise, there’s a strong possibility that you’ll end up in the same position you were before.