The ABCs of Credit Card Balance Transfers

Balance debt and your budget with a balance transfer.

A balanced financial life with balance transfers

Balance transfers are a popular form of debt consolidation because they provide a means to fix your financial troubles on your own. However, a balance transfer done incorrectly or in the wrong circumstances can actually cause more financial trouble than it will fix.

So how do you execute a balance transfer successfully and how can you know for sure you are making the right decision for your finances? The information in this section explains balance transfers so you know what to expect, when to use them, and (most importantly) how to tell when you’d be better off with a different solution.

Fact: A FINRA survey showed 36% of respondents did not know the APR on their most used credit card.

What is a balance transfer?

A balance transfer is a financial transaction where you move an existing balance from one credit card to a card with a lower interest rate. The idea is that by transferring balances from your high-interest cards to one with a much lower rate, interest won’t build on your debt as fast. As a result, you get out of debt quicker because each payment you make eliminates more of the actual debt instead of just the interest added that month.

Pop Quiz

If you have a $5,000 debt on a credit card, how much more interest would you pay at 15% APR than you would at 10% APR?

a) $500 more

b) $1,000 more

c) $4,000 more

d) $7,000 more

Reveal Answer

The total interest paid at 15% APR would be $7,517.67, while the interest paid at 10% APR would only be $3,259.95. That’s $4,257.72 more in added interest charges.

c) $4,000 more

Return to question

When do balance transfers work?

A balance transfer can only work if the interest rate on the credit card being used for the transfer is low enough to deliver the financial benefit you need. If the interest rate isn’t low enough, then added interest charges will eat up too much of your monthly payments. You’ll stay in debt longer with more money paid to the creditor in added interest before you pay off the debt.

Being successful in transferring credit card balances is all about what kind of credit card you can qualify to use for the transfer. There’s no specific interest rate value that determines if a balance transfer will be good or not. Instead, you have to weigh your needs against what you can qualify to use.

Fact: With excellent credit, you can qualify for 0% APR on a balance transfer credit card for up to 24 months.

In any case, you need to have to have excellent or at least very good credit in order to make a balance transfer a viable option. Most people open a new credit card when they want to transfer their balances, because credit card companies offer highly attractive introductory balance transfer APR on many credit card offers. More often than not your existing credit cards have APR that’s too high to provide a benefit in transferring your debt.

Tips for Successful Balance Transfers

The following tips can help ensure success when you want to transfer your debt to a low-interest credit card:

  1. Aim for 0% APR. A strong credit rating will allow you to qualify for a credit card that has a Balance Transfer APR of 0% for an introductory period. This means no interest accrues on your debt during that time and all the payments you make go directly to reducing your principal quickly. If you cannot qualify for 0% APR or at least qualify for a rate in the single digits, consider using a different debt solution.
  2. Check the fees. Some credit cards may offer 0% APR, but charge fees for every balance transfer transaction you make. These fees can easily add up to increase your debt and reduce the benefit provided by the balance transfers. This is especially true when you are transferring multiple balances.
  3. Streamline your budget for the introductory period. Once the introductory period expires, interest will start to build on your debt again at a rate that could be just as high as before balance transfers. As such, you need to reduce as much of your principal as possible before the introductory period ends. Streamline your household budget to cut out anything that’s not an absolute necessity and implement a debt reduction strategy to reduce your debt as much as possible.
  4. Don’t use your other credit cards. Those zero balances on your other credit cards can be really tempting for shopping and splurging. Spending more money on those cards before you finish paying the balance transfer card off in-full is only making your situation worse. You always want to avoid adding to your debt while you take steps to reduce debt to maximize the benefit provided by your efforts.