Is a Balance Transfer Right For You?

If you're struggling with high-interest credit card balances, a balance transfer may be a good way to give your finances a fresh start in the new year. Here is some helpful information so you can see if this approach is right for you.

What is a balance transfer?

A balance transfer is when you move a certain amount of money that you owe on one credit card to a different credit card with a lower interest rate. You can transfer balances to a credit card you already have, assuming you have enough available credit to do so, or you can open a new credit card.

What are the advantages of a balance transfer?

Balance transfers can help you pay off your higher-rate credit card balances faster, and save money on interest.

Let's break it down with an example. According to Forbes, the industry average for credit card APR is between 20.93% and 27.89%. Let's assume you have a credit card balance of $5,000 and make only the minimum payment each month. Let's further assume that you transfer your balance to a card offering a 0% APR promotional balance transfer offer for 12 months. See chart below for a breakdown:

As you can see in the chart above, not only does the balance transfer allow you to save on interest, you will pay down your principal balance quicker since your entire payment each month is going toward your balance. In fact, using the first scenario in the chart, if you transfer your balance to a 0% APR card, over 12 months you would save $1,260 in interest! And, even if you continue to only make the $150 minimum payment each month, in a year you would shave about $1,800 off of your $5,000 credit card balance.

It's also a smart strategy to find a credit card that has a low APR year-round, so when the balance transfer promotional period ends you still end up paying less in interest fees.

Can a balance transfer help consolidate my debt?

Yes, another advantage of a balance transfer is that you can consolidate your credit card debt into one monthly payment.

For instance, if you move balances from four credit cards to your lowest rate card, you will only be making one payment a month instead of four. That means it's less likely that you'll miss a payment or make a late payment, since you only have one payment due date to worry about.

What is the cost of a balance transfer?

Companies usually charge a fee, typically a percentage of the transfer balance. The industry average is 3%-5%. For example, if you transfer a $10,000 balance, assuming the industry average your transfer fee would be between $300-$500. The savings on interest outweighs the fee, but it's important to factor it in on your decision. Keep in mind that this fee is per transfer, so if you transfer balances from multiple cards, you will be charged a percentage each time.

How can I get the most out of a balance transfer?

To maximize your balance transfer, try this two-step approach. 1) Transfer your balance to a lower-rate credit card and 2) at the same time, increase your monthly payment as much as you can.

Another strategy is to move your balances to a rewards credit card. While you won't earn rewards on the transferred balances, any new purchases you make on the card will earn rewards you can redeem for gift cards, merchandise, travel, and more—or for cash back.

Other factors to consider

For most, a balance transfer makes sense as it frees you from high interest charges for a set period of time so you can pay down your balances faster.

However, it's important to look at your spending habits to see if changes are needed. You don't want to run up charges on your old card again, defeating the point of the balance transfer in the first place. For instance, if you tend to carry a balance every month that may be a sign that you're overspending.

If you share finances with someone else, like a spouse or parent, you may want to discuss your plans with them. Talk about what you hope to achieve financially through a balance transfer—both in the short and long term.

You should also think through a strategy for your old card. Will you cancel it or keep it open? Opening and closing credit cards can impact your credit score, so it's important to understand the effects on your credit before closing any accounts.

Read the fine print

Be sure you know when the special rate and promotional offer period ends. Be disciplined to pay off your balance within the balance transfer promotional period, and be aware of what the regular card interest rate will be after the promotional rate ends.