A reader named Kathleen recently emailed me with a lesson she learned with balance transfer credit cards:
“Hi Rob, I just rolled over one of my credit cards to another at 0%, which has been very successful for me at paying off credit card debt. But I realized in retrospect that I did not do enough homework, and they won. I thought you might like to put something out there so others do the math before they transfer.
I moved a 4.9% balance to a Discover offer where you could choose between 0% for 18 months with a 3% transfer fee or 3.99% for 24 months with a 0% transfer fee. Of course, I chose the 0% interest and felt good until I realized the transfer fee was over $200, and in 18 months I would have saved less than $300 at the present rate.
At the rate I am paying off debt, I will probably pay it off in less than 18 months, but since they charged the transfer fee up front at 0% rather than just letting the interest take its toll at 3.99%, the only way to pay less would have been to pay it off early at the 3.99% rate.
Duh! Hindsight’s 20/20, right?”
Kathleen’s experience isn’t uncommon. While balance transfers can be a cost effective way to tackle your debt, they are not without pitfalls. So here are 10 tips for managing balance transfer cards. These come from my own experience, as well as a number of years blogging about this topic. Hopefully these tips will help you wisely use your balance transfer cards to get out of debt.
1. Know the difference between 0% on purchases and 0% on balance transfers
There are two types of 0% APR introductory rates–purchases and balance transfers. While they both offer no interest, they work in very different ways.
For 0% interest on purchases, the credit card issuer won’t charge interest on purchases you make with the card. You’ll still have to pay a minimum payment each month, but it won’t include any interest charges.
These interest free deals on purchases typically last from six to 18 months. You can simply use your card for purchases, and when you get your bill, you won’t have to pay it off in full to avoid interest charges. Of course, once the introductory rate expires, you’ll be paying the regular APR on any remaining debt on the card.
Zero percent on balance transfers is different. With these deals you can transfer one debt – typically from another high interest credit card, though not necessarily – onto a new card that offers 0% interest on balance transfers. The term “balance transfer” comes from transferring your balance with one creditor to another (typically at 0% interest, but as Kathleen’s email shows, not always).
As you’ll see below, 0% balance transfer cards typically charge a transfer fee, while there are no fees with 0% on purchases.
2. Avoid new debt
The idea of a 0% balance transfer card is to help you get out of debt faster by not having to pay interest. You avoid the high double-digit interest rates that are common on credit cards. As a result, all the money you’re paying towards the card will go towards the principal balance.
But that’s not going to help you if you then start charging up more debt. If you transfer debt off of one credit card and onto a new credit card, that’s fine. You have 0% interest. But it doesn’t do you any good if you go back to that old card and start charging it up again.
So the key is to avoid new debt. It’s absolutely critical or this process is going to end up putting you deeper in the hole.
3. Have a plan
Understand how long the 0% interest offer is going to last, and try to figure out as best you can if you will be able to pay off the debt before the 0% period lapses. If you won’t be able to pay off the debt – or if you’re in doubt – what’s your plan?
I can tell you that in our case, we simply rolled the debt over from one 0% balance transfer card to another until we had it paid off. We did that for a period of about three or four years, and it worked just fine.
That could be a good plan if that option is available to you. But it usually requires a pretty good credit score, which we’ll talk about in a minute.
Regardless of your situation, you want to make sure that you have a plan and that you think through the long-term consequences, even if you get a 0% interest deal that lasts for a year or longer. It may seem far away, but it’s going to come pretty quickly, and you want to know how you’re going to handle this debt once the 0% offer comes to an end.
4. Know the regular APR
Before you sign up for a 0% balance transfer offer, make sure you know what the regular APR is on the card when that offer expires. That way if you have a balance after the deal expires, you’ll know what you’re up against.
Again, you may be able to transfer that debt over to yet another zero-interest card, but it’s still important for you to understand the worst case scenario. If you can’t transfer that debt again, what kind of interest rate will you be paying? Factor that into your decision as to whether a balance transfer option is right for you in the first place.
5. Be aware of the balance transfer fee
Virtually all 0% APR balance transfer cards have a fee. The industry standard is 3%. For every $100 you transfer to the new card, you’ll pay a $3 fee. You pay that up front, and it’s added to your balance.
As a result, when you do a transfer your total debt will go up by the amount of the transfer fee. The transfer is probably still worth the cost because you may be paying 10%, 15%, or even 20% in interest on your credit card debt. To get it transferred to a 0% interest card for a 3% fee is still a really good deal.
6. Watch minimum payments
Many people don’t realize that when you do a balance transfer, your minimum payment may actually go up. I’ve dug into the terms and conditions of many credit card agreements, and it’s not unusual for a credit card issuer to have a different calculation for minimum payments when it comes to 0% APR balance transfer cards.
They’re giving you this money at no interest, so they want it back as quickly as possible. So they often increase the minimum payments that you’ll need to make on any debt transferred to a 0% interest card. For example, I’ve seen deals where the standard payment is 2% of the outstanding balance, but for balance transfers it’s 4%.
Again, a balance transfer can still be a very good deal. A higher minimum payment doesn’t necessarily mean that the offer isn’t for you. But you do want to make sure you know what you’re getting into, and be sure that you can handle the minimum payment.
7. Understand your credit situation
You should know what kind of credit score you need to qualify for the top 0% interest balance transfer cards. You can check this information out on the list of balance transfer offers I track.
Having looked at that data extensively, I can tell you that generally for the best 0% balance transfer deals, you’re looking at credit scores in the low 700s as an average for what gets approved. When you look at the lowest approved scores, you do see approvals for scores in the 600s. Credit scoring is just one factor that a credit card company considers in making its decision. But it’s an important one. If you don’t know your score, here are some ways to get your credit score for free.
Also, when you apply for a credit card, the company will pull your credit score, which counts as a credit inquiry. It’s a hard pull, which we covered in this podcast episode.
When you apply for any credit card, it will be a hard pull, which will have a negative impact on your credit score. So do understand that applying for a 0% balance transfer card – like any other credit card – will bring your credit down a bit because of the inquiry.
That’s the bad news. But there’s a silver lining in all of this.
Over time, 0% balance transfer cards can actually improve your credit score a little bit. That may sound odd, but here’s why. Imagine you have one credit card that’s maxed out at $5,000, and you get a second one for a 0% balance transfer. You transfer that $5,000 to the new card. Before, your credit was maxed out, but now you have two cards with a total of $10,000 in available credit. You still have just the $5,000 in debt, so your credit utilization is much lower.
And since you’re making all of the payments without any interest, you’ll pay down your balance a lot more quickly. Over time, using a 0% balance transfer card can actually improve your credit utilization, which is a much more important factor in your credit scores than inquiries.
8. Ask about checks
When you apply online for a balance transfer card, they’ll give you an opportunity right there on the website to enter information about other credit card debts that you have, and they will even process that transfer for you – assuming you’re approved for the card.
That’s great, but what if you don’t want to pay another credit card? What if you want to pay a car loan? Or a student loan? Or some other kind of debt? In that case, ask about paper checks that you can write to pay debts. With a check, you can pay any debt you have.
9. You can’t transfer debt from the same bank
Typically, you cannot transfer debt from one credit card to another when they’re both issued by the same bank. For instance, you wouldn’t be able to transfer debt from one Chase credit card to another Chase credit card, or from one Capital One card to another Capital One card. They don’t allow that.
So that’s important to know as you start to narrow down your options. If you’re trying to transfer debt that’s on a Capital One credit card, then you want to look for balance transfer cards with other issuers.
10. Find the best deal for you
Right now, the longest balance transfer offer I have seen lasts for 18 months. And there are a number of issuers that offer this, including Discover, Citi, and Capital One. And for virtually all of them, the balance transfer fee is the same – 3%.
Usually that’s the best deal, but Chase does offer a no balance transfer fee deal with the Slate card. It doesn’t last as long at 15 months, but it’s still a pretty good deal.
You can find the latest deals, which change regularly, at this page on Dough Roller. The page gets updated automatically, so it’ll have the best deals – including rates and terms – no matter when you’re reading this post.
Balance transfer cards can be a good way to get out of debt more quickly, but you need to make sure you understand them and use them responsibly.