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Credit Card Balance Transfer

Once you have stopped all spending on credit and are making progress on your debt reduction plan, consolidating higher interest balances to a zero-interest rate credit card can be an effective way to save on finance charges and pay down your debt faster. Make sure you have broken the debt cycle first by stopping all credit card spending, or transferring your balances to a new card could make matters worse by freeing up credit, increasing your capacity to overspend.

Pros

Significant savings on finance charges

Major credit cards can charge 30% interest or more. Moving high interest debt to a 0% card can help you pay down your balance faster and save on finance fees over the long run. If you carry an $8,000 balance on a credit card that charges 30%, you could be paying roughly $200 a month in interest. By transferring your balance, 100% of your payments could go toward principal during the promotional period.

Lower monthly payment

Lower interest rates generally come with lower required monthly payments. This can help with cash flow, but be sure to budget enough each month so the loan is paid off before the promotional period ends.

Zero percent interest rate promotions offered for up to 18 months

If you can make consistent payments and not add to your debt, 18 months (or the length of your card’s promotion period) can give you a finish to work toward, encouraging you to pay your debt off fully by the end of the promotion period.

Faster debt reduction

With no interest, your full payment goes toward your loan balance.

Cons

Post-promotion interest rates generally very high

If you struggle to make consistent payments or continue to increase your debt, you may have a balance that extends beyond the promotion period, which could incur a high interest rate.

Risk of debt spiral

A major risk of transferring your existing credit card balance(s) to a new card is the potential of triggering a debt spiral by freeing up more space for you to spend on your paid off card(s). Make sure you have committed to zero new purchases on credit and are breaking the credit cycle before proceeding with a promotional offer; otherwise, a balance transfer may make matters worse.

Transaction fees

Banks generally charge 3% to 5% of the amount you owe to transfer your balance to the new card. If you owe $8,000 on your current card and select a new card with a 3% balance transfer fee, it could cost $240 to move the balance.


Shopping for credit card balance transfer loans

Banks may offer 0% finance charges on new accounts to eligible applicants. You will usually need a credit score in the high 600s or above, among other factors, to qualify for the best terms. Zero percent promotions are typically advertised for six to 18 months. A transfer fee of 3% to 5% is customary.

For example, if you are transferring an $8,000 balance to a zero-percent card and the fee is 5%, you will pay a one-time transaction fee of $400 to move your balance to the new bank. No finance charges will be assessed after that at long as you pay off your balance within the promotional period.

Terms and fees can vary widely by lender. You can use websites such as comparecards.com and bankrate.com to compare promotions and find a balance transfer offer that meets your needs. Be selective and only apply for the card or cards that fit best. Too many new credit inquiries can lower your credit score. Some banks such as American Express, Capital One and others will allow you to see if you are pre-approved without affecting your credit.