How to Choose a Balance Transfer Credit Card

As appearing on NerdWallet

 

The idea behind a balance transfer is simple: take debt you owe on an existing credit card

and transfer it to one with a lower interest rate. A lower rate means more of your monthly payments go toward paying off your balance instead of interest, thereby saving you money.

If you’re stuck with a balance on a card with a high APR, you may want to consider a balance transfer; you can achieve a significant reduction in the amount you’ll owe over the life of the repayment.

There are other benefits as well. Opening a new card and consolidating your balance can lower your credit utilization rate—a ratio of your outstanding balances to your overall credit limit—a significant component of your credit score.

What’s the catch?

It isn’t always so simple, however. There are fees associated with conducting a balance transfer, ranging between 3-5% of the amount you want to transfer, paid upfront. Additionally, the amount that you can transfer from one card to another is capped at the credit limit of the new card, so you may not be able to move all of your balance at once.

Credit card companies will advertise cards with 0% APR to entice you to transfer your balances, but it’s important to read all of the fine print. A low interest rate can work in your favor in the short term, but the offers are rarely permanent. They last at best, 18 months, at which point the interest rate could rise beyond what you were originally paying.

It’s worth taking the time to do your research. Jumping from card to card in search of lower interest rates or to take advantage of short-term deals can leave with you lots of new credit cards, but without significantly reduced debt. That’s a red flag for future lenders, and can make it difficult to secure credit in the future.

Choosing a balance transfer card

With all of the of low interest balance transfer offers out there, it can be hard to figure out what makes the most sense for you. Here are some basics to keep in mind when picking out a balance transfer card:

  • How long is the introductory low-interest period? 18 months is a best-case scenario; you are likely to come across lots of offers in the 6 to 12 month range. The longer you can hold on to the low APR, the better. But beware, the non-introductory rates can be much higher, in the 10-22% range, and may be triggered by things like a missed payment.
  • What is the transfer fee? They are different for every card, but are usually a percentage of the balance, which can add up to quite a lot if you’re transferring larger amounts. Consider: a 5% transfer fee on a $5,000 balance adds up to $250 in fees.  It’s not just the transfer fee. Be sure to consider transaction fees, late fees, or fees for going over your credit limit.
  • Do the math.  Once you know the transfer fee and the length of the low-interest period, take a step back and consider your options. If you’re not careful, the transfer fee can end up cancelling out the savings you get from moving to a lower rate.

There are a lot of details, but don’t worry – NerdWallet has done the homework for you. You can check our suggestions on balance transfer cards, or compare hundreds of different options to find the best fit for you based on fees and your credit score.

Don’t forget

If it all seems a little like financial sleight of hand, remember: the goal of a balance transfer is to help you pay off your existing debt as quickly as possible. A surefire way to boost your credit score and improve your financial situation is by paying down your debt, not just shifting it onto to different cards.

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