Sometimes, a card balance transfer from one credit card to another credit card makes good financial sense, but sometimes it doesn't. If you wonder if a balance transfer credit will fit your needs and save you money, here is what you need to know about this potential debt relief method.
What is a Balance Transfer Credit Card
Balance transfer is the process of moving your existing credit card balances from a high-interest credit card to a new one.
Even though balance transfers can charge a balance transfer fee of 3-5% of the transferred amount, typically, most of them give a low or 0% intro APR offer for a set period, which can help you save on interest.
How Transferring Your Balance Works
In theory, a balance transfer can help to save money on your credit card interest rate and potentially pay off debt sooner. For instance, suppose you owe $5,000 on a credit card with an APR of 18.9%. Your credit is good, and you receive an offer for a balance transfer card with an introductory APR of 0% for 12 months with a 3% transfer fee. After the introductory balance transfer fee, your standard APR will be 14.9%. Would it be a good idea to take that offer?
In this case, the answer could be "yes." Here's a look at the analysis:
(Source: The Motley Fool)
This balance transfer meets the first requirement for a good balance transfer: it makes common sense financially. Balance transfer can net you $795 in savings for the first year and $17 per month in savings after the promotional period is over. You can save even more money than that by applying the $795 you saved the first year back to your credit card balance, reducing your debt further and faster.
When Balance Transfer Cards Work for Debt Relief
For a balance transfer card to be a good debt relief option, a few additional requirements must be met.
- You have to qualify for balance transfer offers: Opening a new credit card account is not available to everyone. Your financial situation should be fairly stable if you intend to use balance transfer credit cards. Your credit score should be good to excellent, and your credit utilization ratio should be below 50 percent.
- You have to find a credit card with a low interest rate compared to what you currently have: Preferably, you want to find a card with a 0% introductory rate if you really want to make progress in defeating the different types of debt. Look for products and services that offer a long introductory period as well, since the longer the introductory period is, the less interest you end up paying overall.
- You have to find a payment you can live with: Pay special attention to what happens to your lines of credit after the introductory period. Some credit card companies may offer a 0% interest rate, but then charge an exorbitant interest rate after the introductory period. Don't let that happen to you.
To figure out whether a balance transfer would make sense for you, consider and compare the variables that depict your current and expected post-transfer situation.
These variables are:
- Your current APR
- Your introductory rate and the subsequent APR on the new card
- The length of the introductory period
- The cost of the transfer (usually 3-5% of the transferred amount)
- The maximum transfer amount
- Your current and future monthly payments
When Balance Transfers Don't Work for Debt Relief
The biggest variable of all, however, may be something else entirely: it is you and your determination to get out of debt. That is because, despite the advantages it may offer, a balance transfer is nothing more than the act of paying off one credit card with another.
While it may seem like a good strategy, especially if you're considering some of the best cash back cards or best travel cards, it can backfire without proper financial discipline. If you do not exercise financial discipline in the use of your credit cards (both the old one and the one you open for the balance transfer), you may find yourself in deeper debt than before.
Because getting a balance transfer card gives you access to another line of credit, you may be tempted to use that credit card for something other than just the transferred balance.
You Have Other Debt Relief Options to Explore
If you're looking to improve your credit, you need to find the right credit option. Considering a balance transfer does not always make financial sense, so don't hesitate to consider other credit card relief options.
A credit card payoff calculator may help with your financial management, and if you’re still unsure which card to pay off first, our credit card calculators provide a wide range of options to guide you.
If you owe $10,000 or more in credit card debt, debt settlement is a good option to consider. To get more personalized credit card advice, get a personal consultation with our credit cards team and make the right move toward financial freedom. Call a ClearOne Certified Debt Specialist today at 866-481-1597. They can help you explore your options and learn how much debt settlement can save you. Get a free savings estimate today!
