What’s a Balance Transfer Credit Card?
Balance transfer cards are a special type of credit card that offers a very low or 0% interest rate. That means you can keep a balance on a transfer card without having to pay a penny in interest, in some cases. The most common way to use them is to pay off high-interest debt, such as another credit card or loan, and save a substantial amount of interest.
That sounds fabulous, doesn’t it? Well, the catch is that the low rate on balance transfer cards is only temporary. It’s an introductory offer that runs out after a certain period of time, typically anywhere from three months to a year. The amount you can transfer is also subject to the credit limit you’re offered and you must have good credit to get the best offers. Additionally, most transfer cards charge a fee for each balance that you transfer that could range from 2% to 5% of the amount you move to the card. So for a $5,000 transfer, if the card has a 3% transfer fee you’d be charged $150, increasing your debt to $5,150.
Strategy for Using a Balance Transfer Credit Card
To use a balance transfer card wisely, you must have a solid exit strategy for paying your balance off before the promotional rate expires. You should never, ever transfer a balance without knowing for sure that you’ll be able to pay it off in full before the low rate ends. Shifting debt to a credit card with a lower interest rate obviously doesn’t make the balance go away, but it can make the debt less expensive for a limited period of time. That’s called “optimizing” your debt.
A Good Balance Transfer Scenario
Here’s a situation where doing a balance transfer makes sense: Let’s say you’re having a good year at work and are going to receive a $3,000 bonus within six months. You plan to use the bonus to wipe out your $2,000 credit card debt. Instead of waiting for the bonus, you can pay off the balance with a new transfer card that charges 0% interest for six months and a 2% transfer fee. You won’t be charged any minimum payments during the six-month promotional period. If your minimum payment on the old card was $80, now you can save that amount each month instead. Over six months you could save a total of $440 (6 months x $80 = $480 – $40 transfer fee). Once you receive your bonus you would pay off the transfer card in full, before the 0% offer expires.
There’s a great balance transfer calculator at creditcards.com. Plug in your own information to find out how much you could save by doing a balance transfer. Here’s a great guide for more information too: The Ultimate Guide to Balance Transfers.
The Dangers of Using Balance Transfer Cards
But if you’re not positive that you can pay off the full balance in time, don’t risk doing a balance transfer. When the music stops playing and the low rate ends, you might get stuck with a huge, double-digit interest rate on your debt, and few options to improve the situation. You could try to transfer the debt to another low-rate card right away. But if you’re not approved for one, all the savings you had hoped to gain from doing a balance transfer would be lost. You’d probably be worse off than if you hadn’t done a transfer in the first place.
The Best Balance Transfer Cards
Take a look at the Citi® Platinum Select® MasterCard® or even the Discover® More Credit Card. Card offers are always changing, so be sure to do current research on sites like balancetransfers.com, cardratings.com, and creditcards.com.
(Photo by BigBeaks)
{ 4 comments… read them below or add one }
Laura, thanks for the information! I’ve never had to leverage balance transfers to help pay off credit card debt because fortunately for me I’ve never managed to accumulate all that much. **knock on wood** But, I think that for people in credit card debt this is a great option, so long as you follow Laura’s advice and have an exit plan!
I think the scariest thing about balance transfers is that people assume that they’re fixing the problem when they do a balance transfer. The credit card balance is a symptom! Spending is the root cause! Until you fix the root problems it doesn’t matter what kind of tactics you use on your current debt.
@Ace I definitely agree that overspending and irresponsibility can be a root cause of credit card debt. There are other situations, unfortunately, where people get into credit card debt due to medical bills or lawsuits that aren’t covered by insurance.
Great point Laura. That definitely wasn’t something that I considered. =P I guess the real point I was trying to make was that it’s important to understand how you got there, because unless you know how you got there, there’s no guarantee you won’t find yourself stuck int he same situation.
I know someone who used to max out these credit card xfers @ 0% interest a year (and even 0% fees back in the day!) and then turned around and deposited it in a CD or money market, etc. It was risky as hell if you ask me, but at the end of the year by the time it was all paid back off he’d net a good $500-$600 off of interest and what not ;) I’d never try it myself (and never recommend! one mistake and your 0% can turn into 27%!), but I’ll admit I admired the balls he had. He did it for 2 straight years and then stopped.