Should you do a balance transfer? Here’s what to know

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Americans have a lot of credit card debt. Total credit card debt topped $1 trillion earlier this year. The average credit card balance is over $6,000.

With credit card delinquencies and interest rates rising, it’s more important than ever to pay off any credit card debt you've taken on. One of the most effective ways to do this is with a balance transfer credit card.

A balance transfer can be a useful tool if you have high-interest debt on one (or multiple) credit cards. You can potentially save money on interest payments and pay off your debt faster. But, it’s important to have a solid plan in place to pay off the balance to avoid accruing more debt.

Here's a guide on how balance transfers work, what the benefits and risks are, and how to decide if a balance transfer is right for you.

How do balance transfers work?

Balance transfers involve moving existing high-interest debt to a single credit card with a lower interest rate.

Balance transfer cards often come with an introductory 0% interest rate ranging between 12-24 months. During that time, you can focus on paying down your debt without incurring interest. Balance transfers often come with fees, typically a percentage of the transferred amount.

“Balance transfers can be a good solution to minimizing the cost of paying interest on credit card debt if you have a card balance (or even other types of loans) that you can’t pay off easily,” says John Cabell, director of Wealth and Lending Intelligence at J.D. Power.

The 0% period doesn’t last forever, and if you don’t have a plan to pay off the debt once it’s transferred, there’s little benefit. After the introductory period, you’ll pay large interest costs once again. Most balance transfer cards have higher variable interest rates than regular credit cards.

Advantages and disadvantages of a balance transfer

The benefits of a balance transfer card can make it a great money-saver, but it still comes with many of the risks other credit cards inherently hold.

Here are the pros and cons of doing a balance transfer.

Advantages:

• Lower interest rates: You get the opportunity to obtain a lower interest rate on your debt. By transferring your balance from a high-interest credit card to one with a lower interest rate, you can save money on interest payments and potentially pay off your debt faster.
• Debt consolidation: If you have multiple credit cards or loans, a balance transfer can help you consolidate your debt into a single payment. This simplifies your financial situation and makes it easier to manage your debt.
• Introductory 0% APR offers: Many credit card issuers offer introductory periods with 0% APR on balance transfers. This means that for a certain period, you won't be charged any interest on the transferred balance. This can be a great way to make progress on paying off your debt without accumulating additional interest charges.

Disadvantages:

• Balance transfer fees: Some card issuers charge a fee for transferring your balance, often a percentage of the transferred amount.
• Limited introductory period: The 0% APR introductory offers range from 6 to 18 months. If you're unable to pay off the balance within this period, the interest rate may increase significantly, erasing the benefits.
• Impact on credit score: Applying for a new balance transfer card may result in a temporary dip in your credit score. This is because a balance transfer involves a hard inquiry on your credit report, which can temporarily lower your score.
• Temptation to accumulate more debt: Once you've transferred your balance to a new credit card, you may be tempted to start using the old card again. This can put you in a worse financial situation if you're not disciplined in managing your spending.

Should I do a balance transfer?

If you have too much debt, you may not be able to qualify for a balance transfer card. If you have too little debt, it may not make sense to open a new card to deal with your payments.

To decide if you should do a balance transfer, ask yourself these questions.

1. What’s the interest rate? Compare the interest rates on your current credit card and the potential balance transfer card. If the new card offers a lower rate, it may be beneficial.
2. What are the fees? Take into account any balance transfer fees associated with the new card. Most balance transfer fees range from 3% to 5% of the amount of the balance transfer. For a $5,000 balance transfer, that’s $150 to $250. Ensure that the potential savings on interest outweigh the fees.
3. What’s the promotional period? Evaluate the length of the promotional period for the low or 0% interest rate. Determine if it provides enough time to pay off the transferred balance.
4. Do I have a repayment plan? Have a clear strategy in place to pay off the balance within the promotional period. Failing to do so could result in higher interest rates afterward.
5. How will it affect my credit score? Opening a new credit card may temporarily lower your score, but responsible card use can help rebuild it.

Times when a balance transfer makes sense

Here’s when it may make sense to do a balance transfer.

• You have high-interest debt. If you're carrying a balance on a credit card or loan with a high interest rate, a balance transfer can be a smart move. By transferring the balance to a card with a lower interest rate, you can save money on interest payments and potentially pay off the debt faster.
• You have multiple debts. A balance transfer card could help you take debt from multiple sources and consolidate it into one place, with one payment.
• You’re having trouble dealing with high interest. High-interest credit card debt snowballs quickly, making it harder to pay off. A credit card with a 0% APR period could help you chip away at your balance.

Times when a balance transfer doesn’t make sense

But there are times you may be better off managing your debt without a balance transfer.

• You have a small amount of debt. Since balance transfer fees are often between 3%-5%, it may not make sense to pay the balance transfer fee if you only have a small amount of debt. For smaller amounts, it could make better sense to pay off the debt where it already sits.
• You have too much debt. Approval for the best balance transfer cards is contingent on your credit score and existing debt levels. If the introductory period is too short and you don't think you can pay off the debt within that time, it may not be the best choice.
• You have an unstable financial situation. If you're facing uncertain financial circumstances, such as job loss, a balance transfer may not be the best option. Transferring debt could add more financial stress if you can’t meet the new payment obligations.

Best balance transfer credit cards

When looking for the best balance transfer credit cards, consider the introductory 0% APR period, balance transfer fees, and interest rates. Here are some top options:

• Citi® Diamond Preferred® Card: This card offers an impressive 21-month introductory 0% APR period on balance transfers. It doesn't charge an annual fee, but it does have a balance transfer fee.
• Chase Slate Edge℠: This card is known for its balance transfer benefits. It offers a 0% APR introductory period for 18 months, and there’s a 3% balance transfer fee if you transfer your balance within the first 60 days of account opening.
• Wells Fargo Platinum Card: With this card, you'll enjoy an 18-month 0% APR period for both balance transfers and purchases. It has no annual fee but does charge a balance transfer fee.
• BankAmericard® Credit Card: This card offers a 0% APR introductory period for 18 billing cycles on balance transfers made within the first 60 days. It doesn't charge an annual fee but does have a balance transfer fee.

Alternatives to a balance transfer

If a balance transfer doesn't seem like the right option for you, there are alternative strategies you can consider to manage your debt.

1. Snowball debt payoff method: With the debt snowball method, you focus on paying off the smallest debt first while making minimum payments on other debts. Once the smallest debt is paid off, you move to the next smallest debt.
2. Avalanche debt payoff method: The debt avalanche method focuses on paying off debts with the highest interest rates first. Both methods can help you gain momentum and motivation as you see your debts decreasing.
3. Negotiate lower interest rates: Contact your current credit card issuers or lenders and try negotiating for lower interest rates. Explain your situation and ask if they can offer you a reduced rate. Sometimes, they might be willing to work with you to keep you as a customer, especially if you have a good payment history.
4. Debt consolidation loan: If you have multiple debts with high interest rates, consider applying for a debt consolidation loan. This loan allows you to pay off all your existing debts with a single loan, typically at a lower interest rate. The best debt consolidation loans can simplify your payments and potentially save you money on interest charges.
5. Home equity loans: If you own a home and have built up equity, you may be able to use a home equity loan to borrow against the equity you've accumulated. The funds can be used to pay off high-interest debts, including credit card balances. Home equity loans often have lower interest rates than credit cards, but you're putting your home at risk if you can’t make the payments.
6. Credit counseling: If you're struggling to manage your debt, credit counseling can be a helpful resource. The best credit counseling services can provide guidance on budgeting and debt management plans. They can help you make a personalized plan to pay off your debts.
7. Debt settlement: If you're facing overwhelming debt and need professional help, consider working with a debt attorney. They can provide legal advice and help you negotiate with creditors. Debt settlement companies negotiate with your creditors on your behalf to settle your debts for less than what you owe.

How to do a balance transfer

To do a balance transfer, you’ll want to research and compare cards, apply, and initiate the balance transfer.

First, look for cards offering favorable terms for balance transfers, such as low or 0% introductory interest rates and reasonable fees. Consider factors like the duration of the promotional period, the regular interest rate after the promotion ends, and any fees.

Once you've selected a balance transfer credit card, apply online. Provide the necessary personal and financial information as requested. Keep in mind that approval is subject to the card issuer's evaluation of your creditworthiness.

Once you’re approved for the new credit card, contact the issuer and provide the details of the balance you want to transfer. A balance transfer typically takes about five to seven days. Then you can start making payments based on the repayment schedule you determined. Try to avoid making additional charges on the card and keep it only for paying off your existing debt.

The bottom line

If you have high-interest debt, a balance transfer can potentially save you money on interest payments and help you pay off your debt faster.

It's important to consider the terms and fees associated with the balance transfer, including the promotional period and any balance transfer fees. Plus, having a clear plan to pay off the transferred balance within the promotional period is crucial to avoid accumulating more debt.

Assess your financial situation, compare your options, and consider seeking advice from a financial advisor to determine if a balance transfer is the right for you.

Editorial disclaimer: Opinions expressed are author's alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.