What Is a Balance Transfer (and Should I Consider It)?

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If you’re struggling with high-interest debt, a balance transfer credit card could be the solution to your problem. By moving balances from your high-interest credit cards to a balance transfer credit card, you can score a 0% interest rate for 12 to 21 months, buying you time to make faster progress on your debt – or even pay it off entirely. Not only can you do this with minimal or even zero fees, but you can save hundreds – or even thousands – of dollars in interest during your balance transfer’s introductory offer.

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Many consumers are hesitant to get another credit card when they’re already in debt, however, and that makes sense. With yet another credit card in your wallet, you could potentially get even further into debt, right?

That’s absolutely true, if you’re not careful and disciplined. Yet many people have learned how to use a balance transfer to their advantage. As with anything else, there are certain rules you should follow when you transfer a balance, and best practices that keep you from spiraling back into debt. We’ll get to some of those tips in a minute.

How a Balance Transfer Works

Let’s start with how this process works. When you’re ready to transfer a balance, the first thing you’ll do is shop around for a new balance transfer credit card. While there are several criteria to consider, the biggest factors worth mentioning are the length of the card’s introductory 0% interest offer, and the card’s associated transfer fees. Let’s look at a few specific cards to illustrate how a balance transfer works in real life.

As an example, the Citi® Diamond Preferred Card® offers 0% interest on transferred balances for a full 21 months. However, it charges a balance transfer fee equal to 3% of the balance. The Chase Slate® (currently unavailable), on the other hand, offers 0% intro APR for 15 months, but doesn’t charge a balance transfer fee in the first 60 days (after that, 5% with a minimum of $5). Neither card charges an annual fee, and both cards revert back to normal interest rates once your introductory period ends.

Let’s say you owe $10,000 in credit card debt at an 18% interest rate — you would likely benefit from transferring that debt to a card with a 0% introductory APR.

If you chose the Citi® Diamond Preferred Card® for your balance transfer, you’d get 21 months to pay off your debt at 0% APR, but you would need to pay a 3% balance transfer fee — equal to $300. Over a 21-month timeline, you’d have to pay around $490 per month to pay off your entire $10,000 balance plus the $300 balance transfer fee. But at the end of those 21 months, you’d be entirely debt-free.

By comparison, if you paid $490 a month for 21 months at the original 18% interest rate, you’d have to keep paying for another four months — almost $2,000 more — before you vanquished the original $10,000 balance.

With the Chase Slate® (currently unavailable), meanwhile, you wouldn’t have to pay a balance transfer fee for the first 60 days. On the flip side though, the 0% introductory APR period is markedly shorter. To become debt-free within this card’s 15-month 0% intro APR period, you’d need to pay $666 per month.

The right card and offer for your situation will mostly depend on how much you can afford to pay each month and which offer works best for your needs. As you shop for a balance transfer credit card, make sure to read the fine print and understand each offer in its entirety.

Tips for Getting the Most Out of a Balance Transfer

While a balance transfer might seem like a no-brainer, there are plenty of ways for this strategy to go awry. If you don’t change your habits and continue using credit to spend more than you can afford, for example, you have very little chance of improving your situation.

To make a balance transfer work, you have to dedicate yourself to using your card’s 0% APR offer to actually pay off the debt. Here are some tips that can help:

  • Don’t forget to factor fees into the equation. As you search for the best balance transfer card for your needs, don’t forget to factor in fees. While at least one card doesn’t charge a balance transfer fee, others charge fees equal to 3% to 5% of the transferred balance. Needless to say, these fees can add up fast on a big balance.
  • Choose the best card for your needs. After you factor in balance transfer fees, you should also look for cards that offer 0% APR for the longest time possible. With more months at 0% APR, you’ll have more time to pay down the debt without paying a dime in interest.
  • Quit using credit cards for purchases. This might be the most important rule to follow. Once you transfer your balances, you must stop using your credit cards for additional purchases. If you continue using your credit cards as you once did, you’ll keep racking up more debt. If you want to stop digging yourself deeper into debt, you must break the cycle and stick to a cash budget instead.
  • Make sure to pay all of your bills on time. The single biggest factor in your FICO credit score is your payment history, so it’s crucial to pay all of your bills on time. Beyond that, paying bills on time can help you avoid late fees and penalty interest rates. If your goal is getting out of debt, you don’t need any new fees in your life anyway.
  • Keep old accounts open – even if you’re not using them. Once you transfer balances from your old cards, you might be tempted to shut them down. Before you do, however, realize that closing old credit card accounts can shorten your credit history and lower your utilization ratio, and thus, lower your credit score. To keep those old accounts working in your favor, keep them open — just don’t use them. (You can cut up the cards or hide them in a drawer to ward off temptation.)

The Bottom Line

A balance transfer can be an absolute lifesaver if you use it wisely, but it may not make a large impact if you continue using your credit cards and racking up debt. To get the most out of these offers, you have to change the way you think about and use credit. And most of all, you have to change the way you spend.

Have you ever used a balance transfer credit card? Why or why not?

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