Consumer Comeback Blog

Balance Transfer Benefits: What to Look for to Save on Interest

Written by Jeffrey Trull

balance-scale-debtI always ignored credit card offers that promised a lower interest rate if I transferred my balance over to another card. That is, until I found myself stuck paying 14% interest on my credit card and looking for a way out.

After ending up with a credit card bill larger than I could pay my senior year of college, I grew frustrated from paying $30-$40 in interest every month. When the next balance transfer offer arrived, I looked a little closer and ultimately decided to move my balance to a card that offered 0% APR for six months. Now that I didn’t have to pay interest, I applied the extra cash to the balance and freed myself of credit card debt four months later.

Balance transfers are one of those tricky things. They sound too good to be true and can be when you don’t use them properly. But with proper research and planning, balance transfers can help you get out of debt faster and more cheaply.

Here’s when you should take advantage of balance transfers and how you can do so effectively.

Can you qualify?

Not everyone will qualify for the best credit card offers, and that includes balance transfer options. It’s simply a fact of having good or bad credit, and many of these cards require an “excellent” credit score of at least 750.

When looking for balance transfer cards, try to only apply for offers that are suitable for your credit score. Otherwise your credit score can take a hit from too many inquiries (and subsequent rejections) within a short period of time.

No or low interest?

The primary reason to take advantage of a balance transfer is to find a lower interest rate than the one you’re paying when carrying a balance on your credit card. This includes zero-interest offers as well as cards that may simply offer rates lower than what you’re paying now.

When choosing a card, you need to be strategic. Will you benefit most from paying zero interest for just a few months, or is a card that charges some interest but at a lower rate than you’re currently paying the best long-term option? Consider this question as well as the following factors before simply choosing the lowest interest rate.

Check the fees

Although you might not pay any interest when you transfer your balance, the transfer itself most likely isn’t free. Many credit card issuers charge a percentage fee of 3-5% of the principal that you’re transferring. When you’re moving a $2,000 balance, this could be $60-$100.

Before you sign on to transfer a balance, figure out how much the fee will cost you and compare this to the interest payments you’re making. The $60-$100 in interest from the example above could be equal to a few months’ worth of interest on your current card. Make sure the savings confirm that transferring the balance makes the most financial sense.

If you see a card with a fee that’s higher than you’d like to pay, you may be able to negotiate a lower balance transfer fee. Bankrate.com has more on how you can negotiate to have the fee lowered to something more manageable by calling up customer service and talking up your loyalty and desire to keep using a card with the respective bank.

Introductory term length

Many credit cards, especially those that advertise balance transfer offers, have introductory interest rates that may increase later. You’ll need to look at the amount of time you have at the introductory rate as well as what the rate increases to after that period. Otherwise, the ugly side of balance transfers come in.

Many times, the standard interest rate can be much higher. For example, the Citi Simplicity® Card offers 0% APR for 18 months, but after that, rates will shoot up to 12.99-21.99% based on your credit. If you don’t pay off your balance, you’ll be back to paying sky-high interest rates on your debt.

Hopefully your goal is to take advantage of this special interest rate to save money as you work to pay off the balance completely. If you’re confident you can pay your balance off within the introductory time frame, choose the lowest APR possible to maximize savings.

Check other terms

Before you sign up, look at the other terms of the credit card offer, too. There are many options out there, so make sure to only accept the best credit card offers.

Will you get 0% interest on new purchases as well, or just the amount that you transferred onto the card? Although you’re hopefully looking to reduce your debt, not add to it, make sure to find out just in case.

What’s the new credit limit of this card? Is it the lower, higher, or the same as the current card you’re transferring your balance from? If lower, be careful, since this will affect your credit utilization, an important component of your credit score.

Make sure to check that there are no annual fees, either. Tacking on extra fees of any kind won’t be helpful when the whole goal of a balance transfer is to keep costs down and pay off your debt.

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