As credit card interest rates continue climbing, consumers aiming to get out of debt are looking for ways to reduce the amount of interest they pay.
One strategy that can potentially provide significant savings is transferring your outstanding balance to a new credit card with a 0% introductory APR promotion.
However, balance transfers aren’t a one-size-fits-all solution, and there are several key factors to consider before taking advantage of one of these offers.
Key Takeaways
- Balance transfer fees of 3-5% can negate some of the interest savings
- You need a plan to pay off the full balance before the 0% APR period expires
- Personal loans may be a better option depending on your situation
- The impact on your credit score should be evaluated
- Pay attention to limitations and exclusions in balance transfer offers
7 Questions to Ask Yourself Before Transferring Credit Card Balance in 2024
Transferring a credit card balance can be a strategic move, but it’s crucial to consider various factors before making the decision. Here are seven questions you should ask yourself:
Is the Balance Transfer Fee Worth Paying?
Nearly all balance transfer offers come with a fee, typically ranging from 3% to 5% of the total amount you transfer. For example, if you transfer $5,000 to a new card, you could be charged a balance transfer fee of $150 to $250.
| Current Balance | 3% Transfer Fee | 5% Transfer Fee |
| $2,500 | $75 | $125 |
| $5,000 | $150 | $250 |
| $10,000 | $300 | $500 |
While this fee may seem like a deterrent, it can absolutely be worth paying in certain situations. The key is to compare the fee to the amount of interest you’d pay if you left your balance on the existing high-interest card.
Let’s say your current credit card has an APR of 24.99%, and you qualify for a balance transfer card with 0% APR for 18 months and a 3% transfer fee. If you transferred $5,000 to the new card ($5,150 with the $150 fee), you’d pay $0 in interest during those 18 months. But if you left the $5,000 balance on your existing card, you’d pay a whopping $2,499 in interest over that same period.
In this scenario, the $150 balance transfer fee is well worth it considering the $2,349 in interest savings. However, if you could realistically pay off your balance in just a few months, it may not justify the fee.
How Fast Can You Pay Off Your Debt?
Before pursuing a 0% APR balance transfer, it’s absolutely crucial to have a solid plan in place to pay off the entire balance before the promotional period ends. Failing to do so could mean that your remaining balance will be charged interest at a much higher ongoing APR once the intro period is over.
To calculate the monthly payment needed, take the total amount you plan to transfer (including the balance transfer fee) and divide it by the number of months in the 0% APR promotional period.
For example, let’s say you transfer $5,000 with a 3% ($150) fee to a card with 18 months of 0% interest. Your balance would be $5,150, which equates to a required monthly payment of about $286 to pay it off within that timeframe.
Monthly Payment Calculation:
- Balance after transfer fee: $5,150
- 0% APR period: 18 months
- Monthly payment: $5,150 / 18 = $286.11
Be extremely realistic about whether you can comfortably afford this monthly payment for the duration of the plan. If you can’t, a balance transfer may not be your best option.
Could a Personal Loan Be the Better Choice?
In some cases, taking out a personal loan for debt consolidation could make more sense than a balance transfer. Personal loans generally have much lower interest rates than credit cards, with excellent credit borrowers often scoring APRs under 10%.
Additionally, personal loan repayment periods can extend to 5 years or longer, versus balance transfer offers maxing out at around 21 months. This allows you to spread your debt repayment over a much longer period for lower monthly payments that could be easier to manage.
| Balance Transfer | Personal Loan |
| 0% intro APR (12-21 months) | Fixed APR for full term |
| 3-5% transfer fee | No transfer fee |
| Repayment periods up to 21 months | Repayment periods 3-7 years |
| Credit limit restrictions | Higher overall borrowing limits |
The biggest downside to personal loans is that they don’t offer 0% interest promotions. However, being able to lock in a low fixed interest rate for several years could be preferential to a temporary 0% APR, depending on the rate you qualify for and your total debt amount.
Personal loans are also instalment debt, which is viewed more favourably than revolving credit card debt for credit scoring purposes. If your balance transfer would max out your new card’s credit limit, a personal loan could be better for your credit utilization ratio.
“Personal loans can be a fantastic option for consolidating credit card debt, especially for those who need more than a year or two to pay it off. But like balance transfers, you need to have a game plan for complete payoff before you commit.” – Personal finance expert Kimberly Palmer
So for balances you can’t reasonably pay in 12-18 months, and situations, where you qualify for a competitive personal loan APR, consolidating with a personal loan, is certainly worth consideration.
Does the 0% APR Apply to New Purchases?
One very important detail to understand about balance transfer offers is whether the 0% APR promotion applies only to the transferred balance, or if it also extends to new purchases made on that card.
Many balance transfer cards exclude new purchases from the intro APR period, meaning any new spending could accrue interest at a much higher go-forward rate. This could negate much of the potential interest savings if you continue using the card for purchases after the transfer.
If you plan to keep using the balance transfer card for new charges, look for offers that apply promotional financing to both transfers and purchases. Just be aware that payments will be applied to the no-interest balance first, so new purchases could still accrue interest while you chip away at the transferred balance.
Does the Low Interest Rate Expire?
Balance transfer cards advertise tantalizing 0% APRs, but it’s crucial to understand that these are temporary promotional rates that have an expiration date. Typical 0% APR periods for balance transfers range from about 6 months on the low end to as high as 21 months for the best offers.
So while you may score 0% interest for over a year and a half, any remaining balance when the promotion ends will begin accruing interest at a much higher ongoing APR, which could be over 20% in some cases.
Here are a few examples of current excellent balance transfer offers and their 0% APR period lengths:
Top Balance Transfer Cards for 2024
| Credit Card | 0% Intro APR Period | Go-Forward APR Range |
| Citi Simplicity® Card | 21 months | 16.99% – 26.99% |
| Wells Fargo Active Cash® Card | 18 months | 19.24% – 29.24% |
| U.S. Bank Visa® Platinum | 20 billing cycles | 18.74% – 28.24% |
So if you pursue one of these balance transfer opportunities, it’s absolutely crucial to plan for complete payoff before the 0% APR window closes. Otherwise, you could quickly accumulate interest charges that negate the initial savings.
Is There a Balance Transfer Limit?
Most balance transfer cards don’t allow you to transfer any amount you’d like. There are typically caps in place on the maximum amount that can be transferred.
In some cases, issuers set a fixed dollar limit on balance transfers regardless of the individual cardholder’s credit limit. For example, a balance transfer card may restrict you to transferring no more than $15,000, even if you have a $25,000 total credit limit.
Other card issuers simply limit your balance transfer to a percentage of your overall credit limit, such as 70% or 80%. So if your credit limit is $10,000, you may only be able to transfer up to $7,000 or $8,000.
Be sure to ask the card issuer about any balance transfer maximums or limitations before applying. If the amount you can transfer won’t cover your full outstanding balance, decide if it’s still worth pursuing.
7. How Will It Impact Your Credit Score?
When considering a balance transfer, it’s crucial to understand how it could affect your credit score. Here are the potential impacts:
- Credit Utilization: Transferring a large balance to a new card and maxing out its limit could temporarily increase your overall credit utilization ratio, which may lower your credit score. However, paying down the balance quickly can mitigate this impact.
-
Length of Credit History: Opening a new credit card account for a balance transfer can decrease your average age of accounts, affecting about 15% of your credit score. Over time, as the new account ages, this effect diminishes. Conversely, closing the old account you transferred from could also negatively affect your length of credit history.
- Credit Mix: Having a mix of different account types is favorable for credit scores. Opening a new credit card account as part of a balance transfer could provide a small boost in this category if you lack that account type already.
- Hard Credit Inquiries: Applying for a new balance transfer credit card results in a hard inquiry on your credit reports, causing a small, temporary score drop. However, the impact of inquiries is minimal and typically lasts about a year.
According to credit expert John Ulzheimer, “Balance transfers can be tricky in terms of credit scoring. Maxing out the new card’s limit will likely drop your scores temporarily, but paying it off quickly could improve utilization, which is very important.”
While potential credit score impacts shouldn’t necessarily deter someone from using a balance transfer, it’s essential to monitor your credit reports and have a plan to rapidly pay down the new balance.
CHECK THESE OUT:
