Balance transfer credit cards with a promotional 0% grace period can provide you time to pay down high interest credit card debt. But even if they have 0% interest, they still come at a cost and a risk of adding more debt if your spending isn’t under control.
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If you’re struggling with rising credit card balances, you’re not alone. According to a recent TransUnion report, the average credit card debt per borrower in Q3 2023 was $6,088. Naturally, as balances increase, people are looking for a way to manage that debt and avoid high interest charges. Balance transfer credit cards can be enticing because many offer promotional rates for transferred balances for new account holders.
Here are some things to know about balance transfer cards:
What is a balance transfer credit card?
Most major credit card issuers offer a credit card with a promotional grace period for balance transfers. You can find cards with 0% interest on balance transfers for a year, all the way up to 21 months and longer. Promotional grace periods and other terms depend on the lender and are card specific — not all cards have the same features. The better your credit score, the better your chances of being approved for a new credit card. In general, cards with generous promotional offers like 0% balance transfers or bonus rewards points tend to be reserved for people with good credit scores.
0% interest is certainly a good deal, but transferring a balance is rarely free. Most credit cards charge a fee for each individual transfer, usually between 3% - 5%. You can find the amount your potential card will charge in the terms sheet. Card issuers will link to the terms sheet online, usually under the “Apply Now” button.
Know where you stand
Because credit balance transfer cards may require a good credit score, you may need to rebuild your credit before applying. Since everyone’s credit history is different, you’ll want to read through your own credit report to see where you stand. Making payments on time and doing your best to pay down balances is a good way to start. Other credit score factors to consider include limiting new credit applications and keeping accounts open, especially if the accounts don’t have an annual fee.
You likely have a good idea of your total credit card debt from reading your monthly credit card statements and checking your balances using the bank’s online portal. To be sure you have the complete picture of your debt, you should read your credit reports. You can get free, weekly access to your credit reports through annualcreditreport.com.
Information is added to your credit report when the credit reporting agencies receive updates from your creditors. Not all creditors report to all credit reporting agencies, so your credit reports may look slightly different. Creditors tend to update once a month, so if you have online access to your accounts, they may be the most up-to-date reference for your balances. But your credit reports are a good way to see all of your active accounts in one place.
What impact will a balance transfer credit card have on my credit score?
Applying for a new credit card can result in a hard inquiry on your credit report. This is a sign you’re potentially taking on additional debt. A hard inquiry will have a temporary negative impact on your credit score. Hard inquiries remain on your credit report for two years, though the impact a hard inquiry has on your credit score lessens over time.
A new card can also impact your credit utilization rate. With a new card comes an additional credit limit. This credit limit from your new card will be added to your overall credit limit. Since your credit utilization rate measures how much of your total credit limit you’re using, if you don’t add to your balances, the new credit card and its accompanying credit limit could lower your credit utilization rate. The lower your credit utilization rate, the better it is for your credit score.
This doesn’t necessarily mean it’s wise to apply for a bunch of new cards to try to lower your credit utilization rate. With additional cards comes additional opportunities to spend. If you’re not disciplined with your spending, this could lead to balances growing even more. Also, with new credit applications, hard inquires may be placed on your credit report, which can impact your credit score.
How do balance transfers work?
You can transfer the balance from one or multiple cards to a balance transfer card. Though, you typically can’t transfer a balance from a card offered by the same issuer. Card issuers usually offer multiple ways to transfer your balances, which include:
- Over the phone
- Electronically both during or after the application process
- With balance transfer checks from the new card issuer
Before you initiate a transfer, gather all necessary information for your accounts, like the account number and balances. Your new card will likely have a limit on how much you’ll be able to transfer. The limit is typically the credit limit of your new card. There may be a period during which you need to make your transfers to be eligible for the promotional rate. If you transfer a balance outside of that period, those transfers may be subjected to the standard interest rate, which on credit cards can be higher than 20%.
A transfer can take weeks to complete, so in the meantime, make sure you continue to make payments on your other cards, even if you started a transfer from them. You don’t want to miss a payment on your other cards since it can have a negative impact on your credit score.
Be cautious with new purchases
Some cards include a grace period for new purchases. Reading the fine print is a must so you fully understand how your new card treats new purchases made after balance transfers. Typically, if a card issuer offers a 0% interest rate on new purchases, that grace period isn’t as long as the grace period for the balance transfer funds. You want to be sure you understand if and how interest will be applied to new purchases if they are outside of any promotional period.
In some cases, new purchases may be charged interest until all balances are paid off, including any balances you transferred. This is because card issuers tend to apply payments towards the lowest interest rate balance first. This means your payment would likely go toward the promotional balance, not your new purchases. So the balance of new purchases would continue to accrue interest until the entirety of your balance is paid off. If you have any questions, contact the card issuer.
Beyond the interest rate, there’s a mental hurdle to adding new purchases to your dedicated balance transfer card. This card is ideally to be used to temporarily store balances that are meant to be paid back. Adding new funds, regardless of whether they qualify for promotional rates or not, is adding to that balance, which can make it more difficult to pay off. To be most effective, especially if paying down debt is your primary goal, consider balance transfer cards as a place to store and pay off balances, but not to be used for everyday purchases.
Pay down the debt
Before you transfer your balance, you’ll want to put a plan in place to pay it off before the end of the promotional period. If your balance is particularly high, do the best you can during the grace period of 0% interest. As the grace period approaches, you can reassess where you are at.
You’ll want to start by taking stock of your financial situation, and creating a strict spending and savings plan. Any extra money available after accommodating your living expenses can be allocated to paying down your debt. You may have other debt beyond credit card debt and other financial obligations. Take special consideration in how you approach paying down all your debt. It may be tempting to pay off other debt before your balance transfer card, after all, it likely has a 0% interest rate. Remember the financial impact your standard interest rate could have on your outstanding balance when your 0% interest rate grace period ends. It’s not just the amount of the debt or interest rate that should dictate what you prioritize, but the timeline as well.
If you’re struggling with credit card debt, there are multiple options to consider, and balance transfer credit cards are just one of those options. A credit counseling service may be of help if you need a plan tailored to your needs. Just because you’re paying down debt, doesn’t mean you should neglect your savings. Actively building an emergency fund can help you avoid using high interest credit cards should a sudden expense come up. You can learn strategies to accommodate both in our blog Should I Save or Pay Off Debt?