First, you might wonder what a balance transfer card is and why anybody would want one.
A balance transfer card is simply a credit card that you sign up for, and assumes the full balance of your current credit card. Let’s say you owe $13,452 on your credit card. You sign up for a balance transfer card and you now owe zero on your credit card. Just like magic. Except for one important detail; you now owe $13,452 on the new card.
OK, so why would you want such a card? On your old card, you were probably paying over $200 per month in interest payments. That’s because the interest rate is likely to be in the range of 16 percent, unless you have a bad credit score (in which case you could be paying much more).
But on the new card, you might be paying as little as $20 per month or maybe even…nothing at all! That’s because a balance transfer card is especially designed for people whose credit card balances have risen and need drastic interest rate relief.
OK, so now you might be asking, “Who wouldn’t want such a card?” Well, I did mention some caveats. So before you apply for a balance transfer card, it would be wise to be armed with this information.
Balance transfer rates are temporary. When you sign up for a balance transfer card, be advised that the low, low rate will last for only six months, or twelve or fourteen months, or sometimes eighteen months. Temporary relief is better than no relief, but there are other factors involved.
ACTION: Look for a card with the longest possible grace period.
The advertised “0% APR” might not be zero percent for you. If you have a poor credit rating, it is possible that you will pay interest. The acronym APR stands for “annual percentage rate”, but it is often advertised as “typical APR. This gives issuers the flexibility to cover their backs for higher-risk customers – especially higher risk customers who come to them already bearing deep credit card debt.
ACTION: Make sure you are paying zero percent. If not, it’s time to call up your credit report to see what can be fixed on it.
Regular APR might be higher. What happens if you switch from a credit card with an interest rate of 16 percent to a balance transfer card with 12 months of zero APR and a regular rate of 18 percent? Well, if you have accrued no additional debts on the card and paid off none, retaining your $13,452 debt, you will now be paying an extra $20 or so per month. You got a delay, a reprieve, but your long-term outlook is worse than before.
“Once you are approved for a balance transfer card, it is absolutely critical that you immediately start to apply the money you would have paid in interest on your old card toward paying down the principle on your new card,” says Chris Mettler of CompareCards.com, a company that actually signs people up for balance-transfer credit cards. “Your entire focus needs to be on reducing your total debt before the full rate kicks in at the end of the introductory period. If you do that, a balance transfer card can be very effective indeed.”
ACTION: Look for a card with regular APR the same or lower than your current card.
Balance transfer cards usually come with an upfront fee. This fee is typically three to five percent of the balance being transferred. Yes, I know that sounds onerous, but that’s what one bank does to reduce the risk of taking on a debt you ran up at another bank. If you just let the debt sit on the new card, this fee alone negates any benefits you might gain. But if you aggressively pay down the debt, this fee can be worthwhile.
ACTION: Shop for a balance transfer card with the lowest transfer fee available.
There might be an annual fee. This might be a small consideration, but some balance transfer cards come with annual fees. If you save thousands of dollars and have to pay $50 per year for the privilege, you might deem that worthwhile. On the other hand, if the savings are only $500, but the annual fee is $150, you might want to reconsider.
ACTION: Check for annual fees before applying for a card.
Other caveats. Ask questions about what the zero APR actually applies to. It might apply only to the balance you transfer and not to new purchases. Or it might only apply to new purchases and not to the balance you transfer. It might or might not apply to cash advances (and that might or might not matter to you). And some credit cards have been known to charge “capitalized interest”; if you don’t pay off the full balance you transferred within the promotional period, you could still end up owing all the interest you would have paid.
ACTION: Ask questions, read the fine print…and use your calculator.
Jeremy Bowles, a freelance writer and part-time video-game addict. Jeremy has worked in a number of different positions for two different banks over the years. He brings forward his experience-based personal finance advice in articles like this to help people understand their options to better manage their money.