Credit card debt can quickly become overwhelming, especially with high interest rates. If you’re carrying a large balance on a credit card with a very high Annual Percentage Rate (APR), you’re paying a substantial amount of interest expense each month.
You can use a credit card balance transfer offer to reduce the amount of interest expense you’re paying each month.
What Is a Balance Transfer?
A balance transfer allows you to move debt from one or more credit cards to a new credit card account. In general, you want to move a credit card balance from a high interest rate to a new card with a lower interest rate or a 0% introductory APR for a specified period, often between 6 and 18 months.
If you transfer to a card with a 0% intro APR, during the introductory period, you won’t have any interest expense accrued on the unpaid balance, which provides you time to make payments and pay down the principal amount.
After the introductory period ends, the card will revert to its regular APR, which could be similar to standard credit card interest rates as high as 30%. However, if you plan carefully, you can significantly reduce or eliminate your interest costs by paying off as much of the transferred balance as possible before the promotional period expires.
How Can a Balance Transfer Save You Money?
For example, assume you have a credit card balance of $5,000 with a 24% interest rate. Each month, you’re paying roughly $100 in interest expense. You start exploring balance transfer options. You receive an offer with a new credit card company where all balance transfers receive a 0% introductory APR for the first 12 months. The fee to transfer the balance is 3% of the principal amount.
You decide to accept the balance transfer offer. You transfer the entire $5,000 to the new card, which incurs a transfer fee of $150 (i.e., 3% times $5,000). The total balance on the new card is now $5,150. The interest rate applied to this balance will be zero percent for the next 12 months. By not incurring interest expense for the next 12 months, you have an excellent opportunity to make payments that significantly reduce the principal balance owed.
Without interest charges, every dollar of your monthly payment goes toward paying off the principal debt. Even if you don’t pay off the entire balance during the promotional period, you will still have made a significant step in reducing the principal balance and saving on interest expense.
What to Watch Out for with Balance Transfers
While a balance transfer can be a great way to save on interest, there are a few factors you need to consider to ensure you get the most out of the offer:
Balance Transfer Fees. Most balance transfer offers include a balance transfer fee, which is typically 3% – 5% of the amount transferred. This upfront cost can reduce some of the savings, so it’s essential to consider the size of the balance transfer fee versus the interest savings by transferring the balance.
Introductory Period APR. The length of the 0% APR period varies by credit card and balance transfer offer, with some offering as little as six months and others offering periods up to 18 months. You should be realistic about how much of the balance you can pay off during that time.
If the promotional period is too short, or the intro period is not 0%, you may not be able to meaningfully reduce your principal balance, leaving you with a larger balance when the standard APR takes over.
Regular APR After the Promotional Period. Once the introductory APR period ends, the regular interest rate will apply to any remaining balance. Make sure you understand what the APR will be after the introductory period, and aim to pay off as much of the balance as possible before this happens. You may find that the new APR will be significantly higher than the existing APR on your current card, so it may deter you from wanting to transfer the balance at all.
Avoid Purchases on the New Card: Some balance transfer cards apply the 0% APR only to the transferred balance, but new purchases may accrue interest at the regular APR. To maximize interest savings, avoid using the card for new purchases, and only keep the card for purposes of the balance transfer.
For example, assume you transfer $4,000 to a 0% intro APR card for a balance transfer. The total credit limit on this new card is $7,000. The APR for purchases is 18.99%. You decide to use the card to purchase a new TV for $600. Although the 0% APR applies to the balance transfer of $4,000, the same zero percent rate does NOT apply to the new purchase of $600. If you carryover the balance related to the $600 new purchase, that balance is subject to the standard purchase APR of 18.99%.
It’s best to setup automatic payments in order to ensure you keep the card current and in good standing.
Is a Balance Transfer Right for You?
A balance transfer can be a powerful tool for saving money on interest and paying down debt more quickly. If you’re disciplined about making payments and taking advantage of the 0% APR period, you can significantly reduce the overall cost of your credit card debt.