What Is a Balance Transfer, and When Is It a Good Idea?
A financial expert weighs in on this common debt-management strategy.
Given the evolving economic impact of the pandemic—from a major spike in unemployment to market volatility—it may be prime time to reconsider the way you're managing your personal finances. While restricting spending and creating (or adding to) an emergency fund is one clear way, you can also minimize credit-card debt by completing a balance transfer.
Just like it sounds, this strategic maneuver entails transferring a credit-card balance from one card to another—ideally one with a lengthy zero-percent intro-APR period, like the U.S. Bank Visa Platinum (20 months) or the Citi Diamond Preferred (18 months). "Then you can work toward paying it off without the total compounding in the meantime," says Steven Dashiell, credit-cards expert at Finder.com. Here, he discusses the main considerations you should take into account before making the switchover.
What to Know Ahead of Time
In most cases, the best balance-transfer cards are ones without an annual fee, and which offer the longest zero-percent intro-APR periods and the lowest "revert" rates (otherwise known as the interest rate that kicks in after your intro period expires), typically bottoming out around 13 percent. If you plan to use the new card as a regular credit card once you've paid off the debt, consider one with rewards like the Citi Double Cash card (which offers two percent back on most purchases) or the AMEX Blue Cash Everyday card (three percent back at supermarkets, two percent at gas stations, and one percent on most everything else).
To qualify for one of these, you'll likely need good credit—around 650 or higher. And the better your credit, the higher the credit limit you'll be assigned on the new card, if you get approved. "With a greater limit, you'll have more chance of being able to transfer your full existing balance to the new card, as opposed to only a portion of it," says Dashiell. (Remember: If you don't move it all over, you'll need to keep making payments on the old card, since that leftover bit will continue accruing interest.)
How to Determine If It's Worth It
Balance transfers usually involve a fee of three to five percent of your total, so you'll want to make sure you have enough debt that the amount you'd save in interest (with the new card) exceeds that fee. On the flip side, you'll also want to double-check that the amount of debt isn't so great that you won't be able to pay it off within the interest-free window. (Once that runs out, the new card's APR could jump to a rate similar to your current one, or even greater.) If that's the case, a debt-consolidation loan may be a more useful tactic, says Dashiell: "It doesn't have an intro period, but instead just allows you to start making payments at a lower—though not zero percent—interest rate that doesn't expire."
Because figuring out just how much you'll pay in interest over time can be a tricky exercise dependent on how much you typically pay per month, it may be smart to punch your numbers into Finder's online balance-transfer calculator. This way, you can quickly know how much you will (or won't) save by making this move and whether it makes sense to go through with it.
Best Practices for Balance-Transfer Cards
Once you've successfully made the switch, it's important to keep up with monthly payments, so you stay on track for paying off the total during the interest-free period. Avoid making purchases with your new card during this time, too: "Not all balance-transfer cards have a zero-percent intro purchase APR," says Dashiell, "so, you could still accrue interest on new purchases even if you're not accruing any on the transferred balance." And even if you were able to transfer the full total of your former balance, avoid cancelling the old card. Keeping it open—regardless of whether you plan on using it—is useful for maintaining credit history and minimizing your total credit utilization (which contributes to a good credit score).