Should I Do a Credit Card Balance Transfer?

Credit Card Balance Transfer

Amanda L. Grossman is a personal finance writer and the creator of FrugalConfessions.com.

Have you ever received a blank check in the mail from your credit card company? I remember the first time that I did. It kind of fascinated me as typically the checks flow in the other direction.

I figured it must have been a good deal for them to allow me to write a check against my credit card, otherwise they would not tempt me to do so. However, what if it was indeed a good deal for me as well? Wouldn’t it be amazing if you could use one of those blank checks to eliminate your other debt? So I wondered, “Should I do a credit card balance transfer?”

What is a Credit Card Balance Transfer?

If you receive blank checks in the mail from a credit card company, it is typically because they are offering you a balance transfer deal (they also offer cash advances this way, but you wouldn’t fall for that, right?). A balance transfer deal is when you open a new credit card to pay off another credit card by transferring its debt over to the new company.

The lure of a balance transfer deal is the outstanding introductory interest rate (often 0%) they offer you that will undoubtedly beat your current interest rate. Having such a low rate means you can put more money towards paying off your principle rather than just paying on the interest.

Terms of a Typical Credit Card Balance Transfer

The introductory interest rate typically lasts from 6-8 months from your date of balance transfer (or a date specified by the balance transfer offer itself). Even though 6-8 months potentially interest-free on your debt sounds like solid financial management, there are some pitfalls you need to take into consideration before deciding if this is right for you.

  • Balance Transfer Fee: There is a balance transfer fee for each offer that is typically a percentage of the debt transferred. A current offer I’ve been given shows that my transfer fee would be $5 or 3% of the balance transferred, whichever is the greatest. This could really eat into any interest savings gained! Sometimes you luck out and your balance transfer fee is capped at $50 or $75, meaning the percentage is much less than other balance transfer offers.
  • Be Wary of the Date Your Grace Period Ends: Once your grace period is up, the full interest rate comes into full effect. Oftentimes, the normal interest rate is higher than other credit cards’ interest rates because they need to make up for the low earnings during your introductory offer.
  • You Cannot Cannibalize an Offer: Typically you cannot do a balance transfer within the same credit card company. So if you have a credit card for Chase and they send you a balance transfer offer, they are looking to acquire additional debt, not debt that you already hold with them.
  • New Purchases get the New Interest Rate: If you decide to purchase items using the new card where your balance transfer is located, the new purchases will be assessed the normal interest rate (this is the rate that is assessed at the end of the introductory period). For my current offer, this amount is 15.24%.
  • You Can’t Miss a Payment: Typically missing one or two payments means that your introductory rate offer is revoked and you will automatically be charged the higher, post-introductory offer interest rate.
  • Ignore the Artificially Low Monthly Payment: Since it is in the credit card company’s best interest to have you paying on the debt well beyond the introductory rate period, they may set a really low minimum monthly payment. Don’t fall for it! Calculate how much you will need to pay each month in order to significantly or completely get rid of your transferred debt before the introductory grace period ends and the higher interest rate kicks in.
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An Alternative to Balance Transfers

Before you walk through this potential minefield, try this alternative. Call your credit card company and negotiate a lower interest rate from them. Think about it: your credit card company is offering these amazing introductory rates to other people. Why shouldn’t they be able to offer something to you? Or lower your rate a few percentage points, which could make a real difference in your debt payoff? If you have a great balance transfer offer in the mail, or even if you don’t, call them today and see what they will do for you.

Hopefully these tips help you answer the question “Should I do a credit card balance transfer?”

If, after weighing all of the facts, you decide that a balance transfer option is for you, then there is one more decision you will need to make. Part of your credit score is based upon your credit history. If you close an account that you pay off with a balance transfer, depending upon the length of time that account was open for, you may ding your credit score. In general you want to keep your oldest credit account open; however, if you know that you are an impulsive shopper and keeping this account open will lead to more spending, then you are better offer closing it down and taking the credit score ding in the short-term for the sake of your net worth in the long-term.

Also check out our Credit Card Debt resource center for more helpful tips and information!

Image credit: flynt

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  • http://twitter.com/mikecraig1040 Michael J Craig

    The devil truly is in the details. Be careful and read everything. Calling the credit card company often does work and it’s free.

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      Great advice, Michael! Very true.

    • http://twitter.com/FrugalConfess Amanda L. Grossman

      It’s definitely a great idea to call the source and talk out different scenarios with them. I have usually found great answers this way. Thanks for sharing!

  • http://www.debtroundup.com/ Grayson @ Debt Roundup

    I used balance transfers all of the time when I was getting out of debt. That game was helped me get back on track. I only did it when I knew that I could have the balance paid off by the time the promo period ended. Every time I paid a fee, but it was much less than the savings potential. I recommend them only if you read the fine print.

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      That’s interesting, Grayson. I’m glad you were able to use that strategy to help you get out of debt. You’re definitely right about the importance of reading the fine print, though!

    • http://twitter.com/FrugalConfess Amanda L. Grossman

      It’s good to hear a success story! I think if you are diligent, and do the calculations ahead of time then it can be a good deal. Thanks for sharing!

  • jefferson @seedebtrun

    I think that there is a way to use them responsibly.. But your certainly need to micromanage them and track them carefully.

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      Agreed! It’s important to be thoughtful about how you use them.

  • http://www.escapingmydebt.com/ Alan@escapingmydebt

    I use balance transfers but am pretty careful to follow the steps you outline above. I am hoping to get out of having to do that within the next year or two as I will be able to just carry an unsecured loan.

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      Glad to hear it’s working for you, Alan. Good luck the rest of the way. By the way, have you tried out ReadyForZero yet?

      • http://www.escapingmydebt.com/ Alan@escapingmydebt

        I have read your newer articles and blogs but have not had a chance to go back through any older ones yet. But as far as your product, not yet. I am planning on sitting down this weekend in between writing a paper for school to work on our finances. I hope to have time then.

        • http://www.twitter.com/bwfeldman Benjamin Feldman

          Okay, great! We are always interested to hear what you think. Good luck with the paper you’re writing.

  • Jim C.

    Good advice! Just to add please remember that after you take that balance transfer then use it for purchases beware! Not only will you pay a substantially higher interest on purchases but when you pay your monthly bill on the card beware they’ll most likely apply a higher portion of your payment, if not all of it toward the reduction of the lower interest portion (the balance transfer) of your balance! My advice is that if you use a balance transfer Do Not use it for any purchases or other cash advances!

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      That is really good advice, and I hope everyone reading this will follow it! Thanks, Jim. One of the ways they get you to pay more interest is by charging the higher rate on new purchases, as you pointed out.

  • Boomers Rock

    We are doing some landscaping and painting and want to do a balance transfer. We are expecting to charge about $20k. We want flexibility to pay off over year. Don’t want to do a equity loan. How do I know the lowest transfer fee will be worth it?

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      That’s a tough question, but it depends on whether you know for sure you’ll be able to pay off the full amount within one year. If so, then you could probably find a 0% interest rate introductory offer (for 12-18 months) that would work well for you. Ultimately, you’ll have to do the math ahead of time to ensure it’s a good decision for you.