Turbo Takeaways
- Balance transfer credit cards allow consumers to move debt from one card to another, paying zero interest for an introductory period.
- Transfer cards work best for consumers with good credit and the ability to quickly repay debt.
- Consumers often choose between a 0% balance transfer credit card and a consolidation loan to pay off debts with little or no interest.
What Is a Balance Transfer Credit Card?
A balance transfer credit card is a new account that lets you shift an existing balance from one card to another, usually with zero interest for the first year or longer. These cards offer new clients an opportunity to catch up on payments without the added costs of interest fees.
Some balance transfer cards even let consumers roll personal loan debt onto the new card, allowing them to effectively consolidate payments and alleviate interest for a brief period of time.
How Does a Balance Transfer Credit Card Work?
When you open a balance transfer account, the card company moves debt from one or more credit cards to the new account for a fee that’s around 5% of your balance. Next, you’ll begin making monthly payments on your debt through the new card, hopefully with no interest.
Balance transfer cards come with stipulations that can affect your payments and zero-interest benefits. Consider the following before choosing to open a new balance transfer credit card:
- Credit Limits
Card companies won’t allow you to transfer any debt above the card’s credit limit. Check the threshold before you choose which new account to open, and if your balance exceeds the credit limit, you’ll need to find another solution to relieve your debt. - New Purchases
Balance transfer cards only shield your transferred debt from interest. Any purchases you make on the new card are usually subject to an APR of 20% or more. - Missed Payments
Plan to make consistent and on-time payments on your new card. If you miss a payment, you’ll likely lose your zero-interest status, landing you back where you started with high-interest debt. - Zero-Interest Period
Cards vary in the length of their zero-interest periods. While some cards offer only 12 months, others could last up to 21 months. Most range between 15 and 18 months, giving you well over a year to pay off debt interest-free. - Transfer Fees
Most cards charge fees ranging from 3% to 5% of your total transferred balance. Some cards don’t charge a balance transfer fee to move your debts. However, these cards typically come with a shorter zero-interest period.
Shop for cards offering low transfer fees and long zero-interest periods, plus any perks that may come with the new card. Credit card companies only offer these accounts to new customers, so look for something with different rewards than what you already earn.
Did You Know?
Closing a card can negatively impact your credit score, while keeping a new card open and not exceeding its credit limit can improve your score. Plan to keep your new balance transfer card open even after you pay off debt for a chance to increase your credit score.
When To Use a Balance Transfer Credit Card
For some consumers, the appeal of paying off a medium-sized credit card balance over 12-18 months without worrying about additional interest is worth the cost of a transfer fee. Used wisely, a balance transfer card could even help consolidate multiple debts, eliminating interest from several accounts and simplifying monthly payments.
Consider your credit score before pursuing this debt relief option. If your score is “fair” or “poor,” you likely won’t qualify for a credit card with zero interest and could potentially pay an even higher APR than your current cards charge. Most card companies look for a score in the “good” range of 670 or higher.
Balance transfer cards tend to work best for consumers with the following circumstances:
- Ability to pay off debt quickly
- Good to excellent credit scores
- Debt balance below the new card’s credit limit
- Fees that won’t exceed the interest owed on current balances
If your financial situation doesn’t look like this, don’t worry. Other debt relief options, such as debt settlement, management, or consolidation, could be effective solutions to tackle your balances.
Balance Transfer Credit Cards vs. Debt Consolidation Loans
Balance transfer credit cards offer one way to consolidate debt. Another way consumers choose to simplify repayments is through a debt consolidation loan. While balance transfer credit cards are helpful for clearing small to medium amounts of unsecured debt, consolidation loans are often useful for repaying larger balances.
To understand which is better for your financial situation, consider the following differences and similarities between these options:
| Debt Relief Option | Interest | Transfer Amount | Credit Score |
|---|---|---|---|
| Balance Transfer Cards | Zero interest for an initial period | Debt transfer limited by credit limit | Requires good credit |
| Debt Consolidation Loans | Possible lower interest rate for the loan’s duration | Debt transfer limited by qualifying loan amount | Requires good credit |
Several factors impact whether a balance transfer credit card or a consolidation loan is your best financial option. The amount of debt you carry heavily influences which option is better. If you owe an excess of $10,000, you may be over the new card’s limit before you even transfer a balance.
It’s also important to consider how quickly you can pay back your debt on a balance transfer card. If you exceed the introductory period, you could get stuck with sky-high interest rates on any remaining debt.
0% APR Offers Expire
A 0% introductory interest rate doesn’t apply forever, and missing a payment can cost you the promotional rate. Before transferring, confirm the promo length, transfer fee, and the new APR after the offer ends.
Debt consolidation programs provide a way for consumers to pay off all major debts at once in exchange for one large monthly payment on a new loan. This option is most effective when you secure a low interest rate on the loan. If not, you risk paying more for your debts over time.
A strong credit score affects both options, as consumers with good credit typically qualify for consolidation loans and have an easier time opening a new zero-balance credit card account.
Taking an honest look at your credit score, credit utilization, and monthly income can give you a clear picture of which option is most effective for clearing your debts.
Is a Balance Transfer Card the Right Choice?
A balance transfer card could work as an effective solution to clear credit card debt when your balance is small to medium and you can commit to paying it off before the zero-interest period ends.
Read terms carefully before agreeing to any new account, including the interest rate once the introductory period is complete. Carefully assess your credit score, utilization, and budget before deciding on this method.
Consider whether other debt relief options could help reduce or manage your debts more effectively, especially if you’re carrying a large balance.
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