Drowning in Credit Card Debt?

What is a balance transfer?

A credit card balance transfer occurs when you take an existing balance and move it over to a new card with a lower interest rate. As a promotion, the new credit card issuer typically offers zero interest or a low introductory rate for a period of time, and then the rate increases to more competitive levels. The teaser rate often lasts anywhere from six to 18 months. Consumers usually do a balance transfer to save money on the debt outstanding or to access better perks, such as reward points or cash back.​

Pay attention to the details

The devil is in the details when it comes to a balance transfer. Zero percent interest for six months may seem amazing, but not if the interest rate resets to a much higher amount once the introductory period is over. If you don’t pay off your balance, you could owe even more. “You want to make sure you end up with a lower interest rate once the balance is transferred,” says McClary. “Once it’s paid off, you’re going to have to live with this account for a little while.”

Let’s say you’re paying 18 percent on your credit card debt and a competing issuer offers 0 percent balance transfers for 18 months. After that, however, the annual percentage rate or APR resets to 30 percent. Although you can pay off that debt for a lower cost during the promotion period, any new purchases will come at the higher rate. Worse, if you don’t pay off the existing debt in the promotion period, the APR will apply to the remaining balance transfer.

“The first objective is an interest rate that makes it more affordable to repay the debt. The second goal is to make sure you can pay off the balance before the intro rate expires so you can make the most of the opportunity to pay it off more affordably,” says McClary. Keep in mind that some credit card issuers charge a fee of about 3 percent of the balance to do a transfer. If you’re transferring a $5,000 credit card balance, a 3 percent fee would amount to $150. That’s manageable if you don’t have to pay interest on your debt for a period of time.

Beyond saving you money, a balance transfer can help you manage your debt more easily. If you consolidate several cards into one, there are fewer payments to make each month. It can also improve your credit score if you keep the accounts open once they are paid off. If you close them after the balance transfer is complete, it can lower your available credit limits and increase your utilization, which will have a negative impact on your creditworthiness. If you do want to close the accounts, McClary says to wait six months, close one account and then wait another six months to close the next.

You’re only as good as your credit ​

Your credit score will dictate the type of offer you’re eligible for. If your credit score is in the upper 700s or higher, you’ll get the best deals. But if your credit score is lower, your options may be limited. Checking your credit score before you begin shopping for a balance transfer will help you apply for the right deals. You can request a free copy of your credit score from Experian, TransUnion and Equifax, the three credit scoring agencies — normally once every 12 months, but due to economic disruptions of the pandemic, as often as once a week at least through December 2023.

Downside of balance transfers

Saving money on your debt and simplifying your finances are benefits of balance transfers, but the option also requires discipline. The last thing you want to do is pay off your credit cards and charge them up again. That’s a real risk for many consumers. “There is a temptation to go out and use those cards that have zero balances,” says McClary. “If you think you’ll be tempted to buy all these accounts, then maybe closing them will be better for you. Even if your credit score takes a small hit, in the long run it’s better to not put yourself in a situation where you’re tempted to run up the debt and it becomes unmanageable again.”