If you’re carrying any amount of credit card debt, you know that it’s likely you’ll pay far more than your initial balance when you factor in interest rates. Every month that you carry a balance, the card issuer will add to your total and paying the minimum amount required each month can add hundreds or even thousands of dollars to your debt.
At Addition Financial, we strive to help our members get out of debt and make progress toward their most important financial goals. Since we are often asked about balance transfer credit cards, here are 10 things you should know about what they are and how they work.
What is a balance transfer credit card?
A balance transfer credit card is a credit card that offers cardholders the opportunity to transfer balances from other credit cards at a low introductory rate. In some cases, the introductory rate may be 0%, meaning that you could eliminate your debt with no additional interest if you can pay the balance before the introductory rate expires.
Balance transfer credit cards typically require good, very good or excellent credit for approval, with many credit card issuers requiring a minimum FICO score of 690 to qualify. The requirement exists because, in many cases, applicants plan to transfer multiple balances and may end up with a substantial monthly payment. The issuer wants to make sure that any approved applicant has the financial wherewithal and ability to make payments in a timely manner.
10 things to know about balance transfer credit cards
Now that you understand what a balance transfer credit card is, here are 10 important things to know before you apply for one.
#1: Balance transfers aren’t free
One thing that many people don’t know is that a 0% intro APR doesn’t mean that there are no fees involved in consolidating your debt on a balance transfer card. Most cards charge a balance transfer fee of between 2% and 5%.
In other words, if you transferred balances that totaled $15,000, you would pay fees between $300 and $750 depending on the card you get. These fees are comparable to the closing fees you would pay if you consolidated your debt with a personal loan.
You should make sure to calculate the total amount you would pay with a balance transfer card, including balance transfer fees, and compare that amount to what you would pay if you left your debts where they are. In many cases, the balance transfer card may allow you to pay less–but only if you pay your full balance before the end of the introductory period.
#2: Interest rates on balance transfer cards change
We already alluded to this fact, but it’s important enough to deserve its own section. While many balance transfer cards offer introductory rates as low as 0%, those rates do not last forever. By law, credit card companies are required to keep the introductory rate in place for a minimum of six months unless you are more than 60 days past due with a payment.
Some credit card companies offer a fixed introductory rate while others offer a variable rate based on the prime rate or some other index. You’ll need to read the fine print to understand what’s being offered. It’s common for rates to become variable after an initial fixed period, too. You should factor potential increases in your rate into your decision about whether to get a balance transfer credit card.
#3: Your post-introductory APR may be based on your credit score
Another reason to read the fine print of any balance transfer credit card agreement is that the APR after the introductory rate expires may be based on your credit score and, in some cases, may actually be higher than the rate on the card where you originally accrued the charges.
Keep in mind that if the rate is higher and it’s not realistic to pay your entire balance before the introductory period ends, you may be better off keeping your balances where they are and adopting an accelerated repayment plan instead.
#4: Balances don’t necessarily need to be from other credit cards
One of the most common misconceptions about balance transfer credit cards is that the cardholder may only transfer balances from other credit cards. That’s not always the case although the rules vary, so be sure to read the fine print.
Here are some examples of balances that may be eligible for transfer:
- Major credit cards
- Store credit cards
- Auto loans
- Student loans
- Mortgages
- HELOCs
- Payday loans
Of course, it’s important to note that transferring a full mortgage or a new car loan would be difficult and in most cases, not cost effective. However, if you have a high interest store credit card or a payday loan, you’ll likely pay far less if you transfer the balance than you would if you left it where it is.
#5: Your best bet is to leave your existing cards open after the balances are paid
If you apply for a balance transfer card because you formed unhealthy spending habits with credit cards, the temptation may be strong to close out your other accounts after you transfer the balances. However, we recommend against it.
When you close out a credit card, you also lower the amount of available credit and that will simultaneously increase your credit utilization rate. As a reminder, credit utilization is the second most important factor in determining your FICO score, accounting for 30% of the calculation. The best option is to leave those cards open without using them.
#6: Balance transfer cards should be used in conjunction with a budget
After transferring their outstanding balances to a low interest rate credit card, it’s not uncommon for people to feel that their problems are solved because they have a low rate and a low monthly payment. It’s important to use a balance transfer card as an opportunity to revamp your spending habits.
As we noted above, you should leave your other cards open to reduce your credit utilization rate. At the same time, we suggest creating a monthly budget and curbing your use of credit cards to avoid accumulating additional debt.
#7: There is no grace period for new purchases
While balance transfer credit cards offer an introductory rate for transfers, that rate does not apply to new purchases made with the card. If you use your card to buy anything new, that balance will begin to accrue interest immediately.
The primary purpose of a balance transfer is to consolidate debt, not to add to it. We suggest considering your new card as off limits for purchases to facilitate the process of paying down your debt.
#8: A balance transfer may temporarily lower your credit score
One reason to consolidate your debt on a balance transfer credit card is that it may improve your credit score in the long term. However, that may not be true in the short term and you should monitor your credit score to see how it is affected.
There are two reasons you may see a dip in your credit score after a balance transfer. The first is that the hard credit inquiry required for approval will cause a small decrease in your score. The second is that the company issuing the card will add your transfer fees to the balances being transferred, which will temporarily increase your credit utilization and lower your score.
#9: You can transfer partial balances
There’s a common misconception that if you are approved for a balance transfer card, you need to transfer the entire amount you owe to the new card. That’s not the case and in some situations, you may be better off transferring a partial balance.
Here are some scenarios where you might not want to (or be able to) transfer your entire balance:
- The balance on your transfer card isn’t high enough to accommodate a full transfer.
- One or more of your balances is on a card that already has a low rate.
- You don’t want to pay the balance transfer fee.
- You only want to transfer an amount that you know you can pay before the introductory rate expires.
You should evaluate your outstanding debt and compare rates and fees before deciding which balances to transfer to your new card.
#10: Not all balance transfer cards charge a transfer fee
While most balance transfer credit cards charge a transfer fee between 2% and 5% of the transferred balance, that’s not true in all cases. If you can find a card that doesn’t charge a transfer fee, you can save hundreds or even thousands of dollars. The trade-off is likely to be a higher introductory rate than other cards, but the savings can still be substantial.
For example, Addition Financial’s Platinum Low Rate Card has an introductory rate of 4.99% but no balance transfer fees or annual fee. If you’re concerned about an increase in your credit utilization rate because of transfer fees, then you may want to consider a card that doesn’t charge for transfers.
Consolidate your credit card debt with Addition Financial
Consolidating credit card debt with a balance transfer card can help you streamline your monthly finances, save money in the long term and even improve your credit score. The key is to read the fine print and do a cost analysis before you choose the balance transfer card that’s right for you.
Are you looking for a balance transfer credit card with no transfer fees or annual fee? Addition Financial has the card for you! Click here to read about our Platinum Low Rate Card and apply today.
