This is Mary, and she’s in credit card debt. Could a balance transfer credit card help her out?
Mary’s a college student living in New York City. She works part time at a real estate office and loves the nightlife. In fact, so much that it’s taken a toll on her finances.
She’s racked up $15,000 in credit card debt and has a hard time keeping up with the monthly payments.
What’s Mary to do? She feels trapped with no idea how to get out of debt. Thankfully, she’s having brunch with her friend Kate tomorrow. Kate has always been good with her finances and might be able to give some advice.
What’s in this guide?
1. Mary learns about balance transfer cards
Mary and Kate are sitting enjoying brunch. After hearing about Mary’s predicament, Kate points out that a balance transfer card could be a good short-term solution to the problem.
“What’s a balance transfer credit card?” Mary asks, intrigued.
What is a balance transfer?
The credit card industry throws around a lot of fancy words. But “balance transfer” is easy to understand.
A balance transfer means that for a one-time fee, you take the debt you owe on one credit card — your balance — and move that amount to another card.
Why do balance transfers matter? They can be a great option if you’re paying heavy interest on your current credit card. With a balance transfer, you can move your existing balance to another card that offers low or no interest for a certain period. This can help you pay off your debt faster and and pay less.
“You said you were in a lot of credit card debt,” says Kate. “How much do you owe?”
Mary tells Kate about her $15,000 balance and 19% interest rate. Kate explains to her how a balance transfer card can help.
“You have a $15,000 balance right now, and you’re paying 19% interest on it,” Kate continues. “That interest is compounded daily — which means while you’re trying to pay off your debt, that debt is continually accumulating interest. Wouldn’t it be nice to get a break from that interest for a while?”
Mary nods yes as Kate continues.
“There are a lot of cards that offer 0% interest on balance transfers for a certain period. Let’s say you make a balance transfer to a card that offers a promotional 0% interest for 15 months. You’ll have to pay a balance transfer fee of, say, 3%. That’s $450 on top of the balance.
Now that you’ve transferred your balance to the new card, no interest will be added to that balance for 15 months.”
Kate adds that it’s important to avoid adding debt to the card while Mary’s paying it off. Mary’s relieved that a helpful option is available.
Why choose a balance transfer card?
Ryan had $6,000 in credit card debt and was paying a high 25% interest on the balance. Because his wife was recently laid off, he paid the minimum payment each month on his balance. Unfortunately, the interest kept piling up and his payments weren’t making a dent into his debt.
Kate recommended a balance transfer card to Ryan, explaining it as a good way to escape the stifling 25% interest rate for several months. Ryan transferred his balance to a card with 0% APR for 20 months.
Without the 25% interest, Ryan felt more comfortable paying the minimum payment for a few more months while his wife transitioned to a new job. Afterward, he started paying $400 a month toward his balance and cleared his credit card debt in 14 months with no further interest payments.
Allison loves to shop. A few years back, she was ecstatic to be approved for a card offering a relatively low 10% interest rate — but she took is as a license to go on multiple spending sprees. Soon, Allison found herself under a mountain of credit card debt.
Even though 10% APR is low, it’s quite a bit when it’s compounding on $25,000 of debt. Allison paid the minimum $750 a month toward her balance, but she knew she would end up paying a lot interest in the long run. In fact, by paying the minimum, she was on track to pay over $4,000 in interest alone.
On Kate’s recommendation, Allison applied and was approved for a balance transfer card. The card’s terms were stellar: A $0 balance transfer fee and 0% APR for 24 months. Over the next two years, Allison continued paying the minimum. She didn’t pay off her debt entirely, but she was able to get it down to a more manageable $7,000.
Mark gets credit card offers in the mail constantly. Over time, he’s applied to a lot of them — right now, he has seven credit cards.
Mark uses his cards every so often because he’s tempted by the rewards for various spending categories. However, it’s a hassle keeping track of his monthly payments. He’s afraid he’ll miss a payment and get dinged on his credit score one of these days. Add on a percentage soup of different APRs, and Mark hasn’t a clue how much interest he’ll pay in the long run.
2. Learning the ropes of balance transfer cards
After her breakfast with Kate, Mary decides that a balance transfer card could be a good option for her. When she gets home that evening, she finds there are a few things to understand about balance transfer cards before applying.
What you should know about balance transfer cards
Before applying for a balance transfer credit card, take note of the following so you’re never taken by surprise:
- You’ll pay a fee for the balance transfer. When you move your balance to a new card, you’ll need to pay a balance transfer fee. As an example, let’s say a card’s balance transfer fee is 3%. If you’re transferring $1,000, you’ll pay a fee of $1,000 x 3% — or $30.
- You’ll get a great APR on your transferred balance. A good balance transfer card offers 0% interest for a while on the debt you transfer. A really good balance transfer card will give you 0% APR for longer. Instead of getting 0% APR for six months, for example, you could get 0% for 21 months.
- After the introductory APR ends, you’ll start paying interest. Some people forget to keep track of when their introductory APR expires and are surprised when they’re charged interest. Consider how long your low intro APR lasts, and consider whether you can pay off your balance (or get close to doing so) within that time.
- You must make monthly payments on time. Here’s one of those conditions that might throw you for a loop: You only get the nice 0% APR if you make your monthly payments on time. After just one late payment, your credit card provider may revoke the promotional APR. Avoid this situation by scheduling automatic payments.
- The process can take awhile. Balance transfers are typically completed within 7 to 10 days. In the meantime, keep up with your monthly payments to avoid taking any hits to your credit.
- Having good credit helps. Credit card providers usually require good credit to initiate a balance transfer. However, if you look around, you can find balance transfer cards for poor credit.
- You can transfer more than credit card debt. Credit card debt is the most common debt moved with balance transfers, but you may also be able to transfer auto loans, mortgages and student loans.
How the credit card companies benefit
“Wait a second,” Mary says to herself. “This 0% APR stuff is a pretty good deal — what’s the catch?”
Later, she asks Kate why credit card companies offer good interest rates for such a long time.
“Credit card companies do have a few incentives to give out these promotions,” Kate begins.
“For one, it can be cheaper to get a new customer this way. Instead of spending a bunch of money trying to advertise to you, they offer nice introductory promotions. Finance enthusiasts like me might tell their friends about those promotions. It’s like cheap marketing.
Another reason is because a card company will start making money from you if you keep carrying a balance. Once the low-APR promotion ends, you’ll accumulate interest on any balance you have. Also, you might even make purchases with your new card, which means you’ll end up paying more interest to the card company.”
“So as long as I’m careful about my balance, I should be OK?” Mary asks.
“Yes,” Kate replies. “But make sure you always read the fine print.”
3. Mary’s adventures in cyberspace
While searching for information about balance transfer cards, Mary stumbles on a personal finance forum. Among a lot of good topics is “Debt consolidation loans.” Intrigued, she clicks to learn more.
Balance transfers and debt consolidation loans
A balance transfer can be a great idea if you’re trying to consolidate debt from multiple sources. However, consider these issues:
- Some card issuers don’t allow balance transfers from multiple cards or other debts.
- If you’re transferring multiple balances, you may need to pay a fee for each transfer.
In light of these balance transfer drawbacks, you might want to look at a debt consolidation loan. With a good consolidation program, you can combine all of your debt into one monthly payment — and potentially pay less each month.
Another topic Mary sees in the forum is “Balance transfers: How much does my credit score matter?”
She sees that a forum administrator is answering questions about balance transfers and credit scores.
The post from the administrator says:
First things first: Your credit score will play a role in what balance transfer cards you’ll be approved for.
Regardless of your credit, most balance transfer cards offer 0% APR for a certain time. The difference usually comes down to what APR you’ll have after the 0% promotion ends (what some people call the revert rate). With a higher credit score, you’ll typically have a lower interest rate; with a lower score, you’ll have a higher interest rate.
Tell me what your credit score is, and I’ll tell you what you can expect!
A forum participant writes back:
Hey, my name is Jack. My credit score is 775. That’s really good, right?
The administrator replies:
Awesome! Anything above 719 is an excellent credit score. After your 0% promotional balance transfer APR ends, your APR will probably revert to an average of 12.24%. You also pretty much qualify for any card you want — including a card that might give you 0% APR for over 20 months.
Several more posts arrive, all with different situations and credit scores. The admin replies to a few posts representing various ranges of credit scores:
- Marcella, if your credit score is 715, that falls under the “Good” category (generally between 680 to 719). You might not be able to apply for every card on the market, but you’ll qualify for a lot of attractive cards. Good going — keep that credit score up!
- Tony, a credit score of 655 is considered “Fair” (the range is 640 to 699). There will be fewer balance transfer cards you’ll qualify for, and your revert rate will be around 20.24%. There are still a few great balance transfer cards for you, though.
- Parker, a credit score of 615 is considered “Poor” (the range is 300 to 619). Luckily, though, your score is above 600, which is just about the cutoff to qualify for a balance transfer card.
- Jennifer, sorry! A credit score below 300 is too low to think about a balance transfer card. You might want to consider rebuilding your credit with something like a secured credit card.
Balance transfer cards and your credit score
Opening a balance transfer card may affect your credit in good ways and bad. Your credit score — also known as your FICO score — changes based on a mix of factors, and getting a new balance transfer card will tweak them a bit.
You might see a slight drop in your credit score when you apply for the card. That’s because opening a new account lowers what is known as your average account age. Lenders look at this metric because they want to see you’ve been using credit for longer periods of time. This drop is usually a small 5 to 20 points. You’ll recover from it quickly with timely payments.
And now the good news: Initiating a balance transfer can lift your credit score by changing your credit utilization rate. As the term implies, it means how much of your available credit you’re using. If you have a balance of $500 and a credit limit of $1,000, your credit utilization rate is 50% — or $500 divided by $1,000.
Lenders like to see a low credit utilization rate. They want to see that you’re not anywhere close to maxing out your credit. So the lower your utilization rate, the better it is for your credit score.
A balance transfer can help with that:
- You have a $500 balance on your current card. This card has a $1,000 credit limit. Right now, your credit utilization rate is 50%.
- Now you transfer that $500 balance to another card with a $2,000 credit limit. Your credit utilization rate is 25%.
With that 25% credit utilization rate, you’ll get a slight increase to your credit score. Learn more about how credit scores are calculated.
4. On the hunt for a winning credit card
Mary’s wants to apply for a balance transfer card, and she’s happy that she could qualify for a really good one. A few factors stand out while she compares the different cards:
- Length of promotional period. Some cards have a 0% promotional APR for a relatively short period, like six months; others offer 0% APR for much longer, 21 months, for example.
- Balance transfer APR. This APR is charged to the balance you transfer to the new card, and is determined by your creditworthiness. This APR may be reduced during a promotional period.
- Balance transfer fee. With most cards, you’ll be charged a one-time balance transfer fee of 3% to 5% when you make a transfer. However, some cards let you transfer balances without paying any fees.
- Other fees and rates. Check out other potential fees, such as annual fees and foreign transaction fees.
- Other benefits. It’s usually best to use a balance transfer card solely for consolidating debt, but card perks may tip the scales when you’re torn between a few cards. Does the card come with a rewards program? How about interest-free days or travel discounts? Perks can be very useful, as long as their value outweighs the costs of a card.
5. Mary learns more about balance transfer cards
While out bowling, Kate offers Mary a few more secrets about balance transfer cards:
- You can transfer as many balances as you’d like to your new card as long as you pay applicable fees and stay within your credit limit.
- You can transfer someone else’s debt to your card, maybe to help out a struggling friend or relative.
You can move your debt from one balance transfer card to another. With “balance transfer arbitrage,” you could profit off the difference.
What to avoid with balance transfer cards
Mary’s just about caught up with balance transfer cards, but there are a few pitfalls she’ll need to look out for:
- You must make payments. 0% APR means your balance won’t accumulate interest within the promotional period. You’ll still need to make at least the minimum payment each month. In fact, paying more will repay your debt more quickly.
- Don’t overlook the revert rate. Once the promotional interest rate ends, any remaining balance is hit with a much higher interest rate. Consider paying off the balance fully before the revert rate strikes. And make sure the card’s revert rate is lower than your old card’s interest rate. That way, if you don’t repay your balance by the end of the intro APR, your debt will grow at a slower rate.
- You can lose that intro APR if you’re late even once. This is one of those stipulations buried in the fine print. To avoid it, apply for a card that doesn’t charge a penalty rate for late payments or set up automatic payments so you’ll never pay late.
- Don’t use the card for purchases. You’re primarily using your balance transfer card to repay debts. Strongly consider not buying anything with the card, adding more to your balance. For emergency purchases, consider using another card with a low APR.
- You’ll pay high interest rates on cash advances. For most cards, the attractive intro APR does not extend to cash advances. APR on cash advances can be very high. Before taking out a cash advance, read your card’s terms and conditions.
- Avoid late fees on your old card. It can take 7 to 10 days for a balance transfer to be completed. To avoid paying late fees, make sure you’re caught up on payments with your old card.
“Alright,” Kate says. “Let me tell you about balance transfer arbitrage.
You know how you get a low introductory APR for balance transfers on a lot of cards? What you can do is write yourself a check for the amount of your balance transfer. Then you put the money you get into a high-interest investment vehicle, like a high-yield savings account.
Over time, you make the minimum monthly payments on your card. And just when your low-APR promotion is about to end, you withdraw all your money from the investment vehicle and pay off your credit card balance. You make a profit off the difference.”
“That sounds kind of complicated,” Mary says.
“For many people, it is,” Kate replies. “And it can be risky. You might not be able to find an investment that gives you a good enough return. Not only that, but you might also build bad financial habits, because you’re always carrying debt. To use balance transfer arbitrage, do your research!”
Mary sets balance transfer arbitrage aside for now, but she’s fascinated by the possibilities. She can’t wait to finally apply for a balance transfer card.
6. Mary applies for a balance transfer credit card
After a week of learning about balance transfer cards and comparing the possibilities, Mary is ready to apply for one.
First, she checks the card’s terms and conditions to read up on the provider’s balance transfer process. And she asks the card company representative how much she’s allowed to transfer.
Next, Mary confirms that she meets the eligibility requirements and submits an application. She includes required documents as well as financial details for her balance transfer.
A week later, Mary is ecstatic to see that her application has been approved and her balance transfer processed.
Mary still has debt, but making a balance transfer takes her one step in the right direction. Instead of paying a crushing APR on her balance, she’s done her research to get a break from interest for a whopping 21 months. It’s well enough time for her to pay off her debt and change her financial habits so she’ll never finds herself in the same situation again.
Mary takes a deep breath and smiles.
“Everything’s going to change — starting now,” she says to herself. “I’m going to tell Kate the good news.”
Comparison of Balance Transfer Credit Cards
What is the CARD Act of 2009?
The CARD Act of 2009 is an amendment to the Truth in Lending Act passed by the House and Senate in 2009 by President Barrack Obama. It’s meant to protect consumers from being charged high fees for things like paying late and going over your credit limit without warning. It reduced the fees credit card companies charged by $16 billion, according to the Consumer Financial Protection Bureau. But the biggest change it made to the industry is that all credit cards are required to plainly display their fees and rates in a way that’s easy for consumers to read — much like a nutritional label for credit cards.
So as you look for balance transfer credit cards and are wondering what the revert APR will be, check under the Terms of Service located on every credit card’s website. You’ll also find foreign transaction fees, late fees and more.
With careful monitoring and discipline, balance transfer credit cards are a solid option to getting yourself out of a mountain of debt. With so many options and offers out there, be sure to compare your options to find the right credit card for your balance transfer.