1. How a balance transfer credit card works.
A balance transfer credit card is like your typical card, except that banks allow you to transfer to it debt you’re carrying on other credit cards. By transferring debt, you can take advantage of a new card’s lower interest rate — or, ideally, 0% APR — even if only during an introductory period.
Even after you’ve factored in a card’s balance transfer fee, you might save hundreds or thousands of dollars by dodging double-digit APRs found with most credit cards.
In our first diagram, we show you what would happen if you paid the same $100 monthly in our scenario above only on a stronger balance transfer credit card instead.
2. The cost of doing nothing? About $4,302 over some seven years.
In the first year of responsible spending on your new balance transfer card, you stand to save $741.69 by taking advantage of its 0% intro period. And if you hadn’t transferred your balance? Paying $100 a month toward your debt, it’d take you seven years and two months to pay it off, further accruing $4,302 in interest.
Assuming that after the intro rate, your new card reverts to the same APR you paid on your old card, you could save $2,076 and fully pay it off 21 months earlier — simply by maintaining your $100 monthly payments.
3. Another cost of doing nothing? Interest fees that eat 73% of your $100 payment.
It can boggle the mind, figuring out total interest over the years. But after calculating how much of your payment is applied toward interest each month, you’ll find these fees eat up 73% of your payment — meaning only 27% chips away at your debt balance each month.
Making only your minimum payment monthly might not be the best idea. That’s because every purchase you’ve swiped or dipped with your card is now manyfold expensive, making quicksand of your debt that’s ever harder to get out of.
4. How does the bank make money on a balance transfer credit card?
When an issuer extends a balance transfer credit card offer, it’s hoping you won’t pay off your balance in the intro period. Worse, it hopes you’ll keep spending, your new credit card accruing high interest on those purchases after the intro period. It’s like when a cell phone company offers to buy out your contract from a competitor so that you can start paying them your monthly phone bill.
If you continued making $100 payments, you’d spend $2,076 on interest alone after the introductory rate expired. That’s on top of $150 in balance transfer fees. A potential $2,226 is good enough reason for a bank to offer 0% APR for the first year.
5. When should you get a second balance transfer card?
If you can’t pay off your debt on your balance transfer credit card within the intro period, you might be tempted to take out another. You typically can’t carry two cards with the same issuer, but another bank might be interested in your business.
Below, we compare the time and money you’ll waste doing nothing compared with making one balance transfer, making two balance transfers under the same terms and paying off your balance within the first balance transfer’s intro period.
6. The most effective way to use your balance transfer credit card.
To take full advantage of a balance transfer credit card, you’ll want to commit to paying off your full balance within the card’s intro period.
Using our scenario, if you can swing $429.17 a month over the first 12 months, you could pocket $4,152 that otherwise would have gone toward paying interest on your old card. That kind of cash is worth budgeting for, cutting costs to pay off your balance within the intro period.
Here’s what you could buy with the money that’s escaped you’ve avoided paying on a bank’s interest and fees.
7. When shouldn’t you transfer a balance?
Compare the fees of transferring a balance against potential interest payments. If you can pay off your debt before your accrued interest exceeds the balance transfer fee, then work to pay the necessary payments to crush that balance.
We know that $150 in balance transfer fees isn’t chump change: It’s represents about two months in interest payments. So if you can afford to pay your debt in two months, a balance transfer may not be worth it. Plus, paying off your debt means an improved credit score the next time credit bureaus update your information.
8. Poor credit is a big reason to avoid a transfer.
If you know you can’t pay off your credit card debt within a new card’s intro period, you could wind up with an APR that’s higher than your original interest rate. And you might also have more difficulty qualifying for a second balance transfer credit. As a result, doing nothing might help you more than applying for a new balance transfer credit card.
Not sure if you have poor credit? Read our comprehensive guide to understanding your credit for tips on improving it.
9. Payment hierarchy — or another potential drawback to balance transfers.
Clearly, the best way to take advantage of a balance transfer credit card is to pay off your full balance during any introductory period. But a low or 0% APR might tempt you into racking up new purchases on the card.
By paying with your new plastic, you risk not only paying off your credit card before the intro period expires, but also paying a higher APR on new purchases — part of a credit card’s fine print.
When a new purchase on your balance transfer credit card garners interest at a rate that’s higher than 0%, each of your monthly payments typically go toward the balance with the lowest interest rate. Until you pay off the balance on the amount you transferred, you’ll accrue the purchase interest rate on your new items.