Transferring your debt to a credit card with low interest or 0% APR is often a great strategy for reducing your debt and saving money – and often a bad strategy. Balance transfer credit cards have a number of advantages, but also some downsides to consider.
If you want to use a balance transfer to your benefit, you need to review a few key things about these credit cards.
How Does a Balance Transfer Work?
A balance transfer is when you shift your debt from one loan or credit card to another. The most common reason to transfer a balance is to save money by moving from a high-interest loan to a lower interest one. Many people also make balance transfers to lower their monthly payment amount. They can help play a role in improving your credit score.
Making the actual balance transfer is easy. With credit cards, you apply for a new credit card with a lower interest rate or an introductory interest rate. Then you can shift any debt from your original credit cards with just a few clicks. You will then be paying your debt, or balance, on the new credit card.
An introductory rate is an interest rate that a credit card offers for a limited time when you first receive the credit card. It’s been an increasingly popular way for credit card companies to attract new cardholders.
Lately, credit card companies have been facing more competition for your business with new issuers, so their introductory offers are getting more attractive. Now, you can find 0% APR introductory offers for as long as nearly two years.
Think about that – it’s like a free loan for two years.
The catch is that you need to plan carefully to repay your debt before the standard APR kicks in. Otherwise, if that standard rate is higher than the original APR you were paying, you may be in a worse situation instead of a better one.
Is it a Good Idea to Do a Balance Transfer?
A balance transfer does not reduce the total amount of debt you owe. But you can save money on interest if you move to a credit card or loan with a lower interest rate, which can be a good idea.
However, if you move your funds to a credit card or loan with a higher interest rate, or if you don’t pay down your debt before an introductory 0% APR offer ends, a balance transfer could end up being a bad idea.
Typically, balance transfers are better for people with good to great credit. If you have poor credit, it may not be a wise idea to open a new credit card, which can negatively impact your credit score, albeit modestly.
The Best Balance Transfer Credit Cards
The credit cards below have 0% APR Introductory offers, which could be ideal for balance transfers. Again, consider your own financial situation and debt load before moving forward with the balance transfer strategy.
5 Best 0% APR Credit Cards
- Citi Simplicity Card
- Citi Double Cash Card
- Capital One Quicksilver Cash Rewards
- Chase Slate
- HSBC Gold Mastercard
The Dangers of Balance Transfer Credit Cards
One thing to watch out for when you make a balance transfer is how a 0% APR introductory rate may apply to new purchases. In many cases, making a balance transfer to get the 0% interest on your current debt may trigger the standard APR on new purchases with no grace period.
A grace period is the time you have to pay your credit card balance without incurring interest. It’s about a month, or 21 days minimum by law.
So, if your new credit card’s standard rate is higher than your original credit card, and you continue to make purchases, you may actually be getting yourself in a much worse situation.
The key, of course, is to not spend any more of your credit line and work on paring down your debt. But if you know you are going to continue to need to use it, be very careful when considering a new credit card for a balance transfer.
You should also watch out for balance transfer fees or other costs. Read the terms of any new card you apply for, and factor in fees when you weigh pros and cons.
If the fees are significant enough to offset any savings from a lower interest rate, it won’t be in your best interest to do the balance transfer.
The Bottom Line
Using a balance transfer credit card can be a wise move if you plan ahead and calculate your costs and savings. Don’t be tempted to jump to a new card with a 0% APR, especially if you have poor credit.
Instead, evaluate your own personal financial situation and see if a balance transfer will be worth your while. In many cases, it can save you a substantial amount in interest payments or lower your monthly credit card payments.