For American households carrying a credit card balance, the average amount of that debt in 2017 was more than $16,000, and that’s a serious weight to carry every month. Even if you just owe a few thousand dollars, if you’re making minimum payments, that means you could pay hundreds of dollars in interest over the course of several years.
While it may seem counter-intuitive to use a credit card to help you get out of credit card debt, balance transfer cards can actually be helpful since they can save you hundreds — and even thousands — in interest while giving you time to spread your debt balance over several months or even years.
Sounds pretty good, right? But the best part is that in today’s competitive market, where credit card companies are trying to outdo each other with sign-up bonuses and perks in an attempt to woo customers to their card, doing your research can mean you’re saving money on interest and getting lots of other features.
To find the best card, you’re going to need to know what to look for, and that’s why we’ve done the hard work for you and laid out all the details here.
Balance Transfer Cards 101
Before you can start putting one of these cards to work, you need to understand what a balance transfer card is and why it’s such a useful tool. These types of credit cards usually offer 0 percent interest over a specific time frame — often 12 to 24 months. This means you can move a balance from a card you’re currently paying interest on, and then you get whatever the time frame is to pay off the balance without accruing any additional interest on it.
We think that’s a pretty sweet deal, and you will too once you see the breakdown on the numbers. Here’s a typical scenario. Let’s say you have two credit cards with the following stats.
Credit Card A
- Balance: $5,000
- Interest rate: 12 percent
- Monthly payment: $250
- Time to payoff: 23 months
- Interest paid: $606.74
Credit Card B
- Balance: $4,000
- Interest rate: 18 percent
- Monthly payment: $200
- Time to payoff: 24 months
- Interest paid: $791.31
Here’s where the balance transfer card comes in. You transfer both balances to the balance transfer card at 0 percent interest for 21 months. Even though the minimum payment on a balance transfer card will often be less than what you were paying before, for the sake of this example, let’s say you decide to just keep your payments the same.
Balance Transfer Card
- Balance: $9,000
- Interest rate: 0 percent
- Monthly payment: $450
- Time to payoff: 20 months
- Interest paid: $0
Let’s add this up. That means you’ve saved $1,398.05 in interest payments and shaved off a full 4 months in payments. That’s a huge savings. Now, you will pay a balance transfer fee for the privilege, but most cards charge around 3 percent of the balance, which means you’re paying $270 to save $1,398. We think that math adds up.
Benefits of Balance Transfer Cards
Saving money is for sure one of the best things about balance transfer cards, but it’s not the only benefit by a long shot. Here are some other perks you can look forward to when you make good use of one of these cards.
- Paying off debt faster. If you’re trying to clear debt in advance of a big purchase (like a house) or so you can move on to a new goal (such as investing more in your retirement), the faster you can get rid of your debt the better, and even a few months can make a big difference.
- Consolidating debt. If your credit card debt is spread across several cards, it can feel like it takes a spreadsheet, five planners and an alarm to keep track of what minimum payment is due when. One slip up, and you could be hit with increased interest rates and penalty fees. Consolidating your debt onto one card makes it much easier to stay organized and make your payments on time.
- Increasing your credit score. Your debt-to-available-credit ratio is a big part of calculating your credit score, accounting for a full 30 percent of the factors leading to your FICO score. So how does moving the debt to a balance transfer card help? It keeps your debt amount the same, but frees up your other cards so that those then show as totally available, lowering your debt-to-credit ratio. Only having one payment to keep track of also decreases the risk of missing a payment, which can be a huge hit to your score.
- Saving on interest. We’ve already covered this in more detail above, but it’s so great it’s worth repeating. Balance transfer cards can save you potentially thousands in interest, which means more money in your pocket that you can put toward a night out, family vacation or that new couch you’ve been wanting.
These things are true of all balance transfer cards, but a good one will also have additional benefits like price protection, phone insurance or a sign-up bonus that gives you even more value. Some of these cards also often have more competitive interest rates for the post-offer period. So if you decide to use this card as your workhorse card after you’ve paid of the transferred balance, you could only be paying 5 to 7 percent interest instead of the higher 12 to 18 percent rates.
The (Slight) Downsides
While we definitely believe a balance transfer card can be an amazing debt management tool when used properly, nothing is perfect. Here’s what you need to be aware of before you start transferring.
- You’ll have to pay a balance transfer fee. Just like we showed in our example earlier, you won’t pay any interest on your transferred balance as long as you pay it off by the end of the term, but you will have to pay a small fee for the transfer. These fees usually range from 3 to 5 percent. It’s nominal when you take into account what you’re saving on interest, but it is something to be aware of.
- You’ll have to switch banks. This doesn’t mean you’ll need to move your checking or savings account, but you can’t transfer balances from the same lender. This means you’ll need to look for a balance transfer card that’s associated with a different bank than the cards you want to transfer from.
- You’ll probably have to pay interest on new purchases. Most balance transfer cards only offer 0 percent interest for transfers, which means you will have to pay interest if you use the card to get groceries or do some online shopping
Balance Transfer Cards vs. 0 percent APR Rewards Cards
Balance transfer cards aren’t the only card on the block, and you’ll want to take a look at all your options before you commit. Here’s how we think balance transfer cards stack up against the competition.
Since the biggest benefit of the balance transfer card is the 0 percent interest, why not just find a regular 0 percent APR card? That’s actually a great idea … if you can find one. Most people who are looking to use balance transfer cards as a way to manage debt probably aren’t going have the credit score — or the debt-to-credit ratio — to qualify for a true 0 percent card. Keep in mind that the lenders still need to make money somewhere, so even if you can get this kind of card, you may see higher annual fees well into the hundreds of dollars or fewer perks than a balance transfer card.
There are cards that have 0 percent APR introductory offers, but these usually apply to new purchase made on the card in a specific time — like the first 3 months — and can have a pretty high interest rate after the introductory period has passed. Some of these cards even charge back interest if you don’t pay off the balance before the 0 percent APR period is up, which can tack on some serious money and time to your balance.
Choosing a Balance Transfer Card
You’ve decided that a balance transfer card is the right choice for you, but you’re not sure which one to choose. With literally dozens of balance transfer cards out there, it can definitely be overwhelming to try and sift through them all and find a card that meets all your needs. Here’s our top three list of things to prioritize when you’re looking for the perfect balance transfer credit card.
1. Longest duration for the 0 percent APR period
You’re transferring your credit card balances because you need more time to pay and you don’t want to keep paying so much in interest, so really, the more time a card gives you with 0 percent interest the better. Term lengths can vary widely, going as short as 6 months and as long as 24 months, so you’ll want to make sure to read the terms carefully before committing. Even if you think you can pay off the balance in 12 months, it might still be better to take the 18-month card if everything else is equal so you have some wiggle room if life happens.
2. Lowest Fees
Balance transfer cards are all about saving money, so if one has a really high balance transfer fee or annual fee, go ahead and pass it by. You don’t want all the money you’re saving in interest to be eaten up by fees when there are plenty of cards out there that have no fee. Don’t forget to check the card details to look for things like foreign transaction or cash advance fees. Even if you’re only planning on using the card to pay off existing debt, you never know what the future will bring, and you might as well go with the card that lets you keep all your options open without having to pay a premium for it.
3. Best Rewards and Incentives
The credit card market is very competitive, and if you have a good credit score and have made a point to always pay your bills on time, you’ll likely have your pick of balance transfer cards that also offer valuable rewards and incentives. What’s of benefit to you is going to depend on where you like to spend your money and time. If you travel a lot for work or just like to visit new places and see new things, a card that offers travel-related perks like complimentary hotel upgrades and free access to airport lounges might be on top of your list. Or, maybe you want to make sure you can keep an eye on your credit, so you want a card that gives you your FICO score for free and alerts you of any potential identify theft or unauthorized purchases.
Seek tip: Narrow your search down by length of 0 percent APR term and lowest fees and then read through the perks of each card that’s left to see which one matches your lifestyle the best.
Pair Balance Transfers and Sign-Up Bonuses
Sign-up bonuses are a way of life in the credit card world, and a balance transfer card that also offers a sign-up bonus can take your savings to the next level. When you’re looking at different cards, make sure you’re paying attention to the comparative value of the sign-up bonus. If the bonus includes 10,000 airline miles, but you never travel by plane, this isn’t going to provide much value for you.
Assuming you’re using your balance transfer card to organize and pay down your credit card debt, a sign-up bonus that gives you points you can redeem for a statement credit or cash in for gift cards might be a better fit. Even if you can’t apply the bonus directly to your balance, the gift cards can help free up money from your regular grocery, gas and holiday budget so those funds can go toward paying off your card faster.
A Path to a Better Financial Future
We clearly think that balance transfer cards are the way to go if you’re juggling multiple cards and multiple balances every month, but they aren’t a magic pill. If you transfer your existing balances and then just run those cards up again, you’re going to get further behind instead of ahead. Make the most of a balance transfer card by making your payments on time and paying for any additional purchases in full, and you’ll be well on your way to financial freedom.