If youre dealing with a high-APR credit card balance that’s costing you $50, $75 or even more than $100 a month in interest, a zero-interest balance transfer could eliminate these finance charges for a year or longer-saving you money and allowing to repay the debt faster.
For example, a card like the Citi® Diamond Preferred® Card can offer a 0% intro APR for 21-months on balance transfers from date of first transfer and 0% intro APR for 12 months on new purchases, so you can pay off debt quickly and interest-free. (Regular APR is % – % Variable).
Is a balance transfer right for you?
If you’re in a good financial place (for example, you have a stable job, a good credit score and your credit card balances are modest, not maxed out), transferring a high-APR balance so you can save money and pay it off faster is smart.
If, however, most of your credit cards are maxed out or your credit score has suffered from making late payments, you’ll be better off looking at other options. Here’s why:
1. Balance transfers require good credit. You’ll need a very good credit score to be approved for a balance transfer credit card.
2. If your debt problem is too big, a balance transfer may make it worse. While balance transfers provide temporary relief from high interest rates, sometimes they exacerbate the problem by giving you more credit that you’ll end up using when money gets tight.
If it sounds like a balance transfer might not be right for you, read more about how to get out of debt on your own or consider applying for a personal loan to consolidate your debt.
How balance transfer credit cards work
Hopefully, its obvious that a balance transfer doesnt actually help you pay down debt; it simply moves the debt from Card A to Card B.
Normally, most credit cards charge fairly high interest rates (12, 15, even 20 percent). If you carry a $5,000 balance on a card with a 20 percent interest rate, you could be paying up to $83 a month just towards interest! So if you pay $100 a month towards that debt, only $17 actually goes to pay down the principal…the rest goes to the bank.
But banks compete with one another. So if youre paying Acme Bank $83 a month in interest, Bob’s Bank thinks “Id like to get that revenue some day.”
- Bob’s Bank mails you an offer of 0 percent APR on balance transfers for 12 months.
- You apply and are approved for the Bob’s Bank balance transfer card.
- You give Bob’s Bank your Acme Bankaccount number and balance.
- Bob’s Bankpays off the Acme Bankcredit card.
- Bob’s Bank charges you a balance transfer fee: between 3 and 5 percent of the amount transferred.
- You start paying your new Bob’s Bank credit card. The Acme Bank card is paid in full.
With the new card, you dont pay any interest for a full year. Your $100 monthly payment goes straight towards paying down your debt. Ultimately, you could save hundreds in interest.
Of course, balance transfers dont always save you money. Depending on how much you owe, your current interest rate, and the cost of transferring the balance (the balance transfer fee), it may not be worth it.
Before you do a balance transfer
Before you transfer a balance, ask yourself the following questions to figure out if its the right move for you.
- Are you absolutely committed to getting out of credit card debt for good? Or is there a chance youll transfer the balance and then start using the old credit card again?
- What kind of credit do you have? Will you be approved for a balance transfer?
Banks also wont extend new credit if youre maxed out or very close to the limits on all of your credit cards. This is called your utilization ratio.
Before you apply for a balance transfer offer, ask yourself if you think you will qualify for the credit card.
- Have you had a credit history for more than a year, two years, or five? (Longer is better.)
If your FICO score is above 720, you are probably good to go. A score from 660 to 720 is a big maybe, and anything under 660 means you might not qualify for an intro rate or a large enough credit line.
Is the balance transfer worth it?
An example: If youre repaying a debt at a 15 percent APR or higher over six months or more, a 0 percent balance transfer with a 5 percent fee starts to make sense. (The actual break even-point depends on your actual APR and your monthly payments, of course.)
If, however, you could repay the debt in less than six months, you might not actually save anything with the 0 percent balance transfer. You would, however, be tempted to let the debt hang around longer because youre not paying interest…for now. You never know when you might face an emergency or lose your income and get stuck with an unpaid debt and an expiring introductory interest rate.