So you racked up thousands of dollars of credit card debt a few years ago.
You were in a tight spot and had to charge your groceries, gas, and other bills. Or maybe you were young and obsessed with shoes.
Whatever the reason, you’ve got a boatload of debt and are barely covering the interest payments each month.
Then, one day, an envelope arrives in the mail. In bold letters, it proclaims, “Transfer your balance to us and pay no interest for a year!”
And you wonder: Are balance transfers a good idea?
What are balance transfers?
Most commonly, balance transfers refer to the process of moving debt from one credit card to another.
When you transfer a balance, it’s usually because the other card is offering a lower interest rate for a certain period of time. The most common offer is 12 months at 0% interest with a 3 percent fee, according to CreditCards.com.
If you have high-interest credit card debt, a balance transfer could save you a significant amount of money — because every payment will go toward the principal rather than toward your mounting interest.
Or if you’re struggling to pay several different credit cards, a balance transfer could consolidate them all into one bill.
Here’s how the numbers might shake out, according to CreditCards.com’s calculator.
Let’s say you’re paying $200 per month on $10,000 of credit card debt at an 18.00% interest rate (APR). If you moved to a card with a 0% interest rate for 12 months and continued paying $200 per month, it still would take you almost six years to pay off your card — but you’d save $4,584 of interest (after fees).
If you managed to pay $858 per month on the card — therefore paying it off during the promotional period — you’d save $8,322 in interest (after fees).
Balance transfers aren’t just for credit cards, either. You can transfer other types of debt, including student loans.
When it comes to your credit score, performing a balance transfer won’t have a significant effect. Because you’ll be opening a new card, your score might drop temporarily — but it should increase later because of a lower credit utilization ratio.
That said, balance transfers generally are available only to people with good to excellent credit. If you’re not in that category, a personal loan might be a better fit and could save you just as much money.
Using the numbers above, let’s imagine you took out a personal loan for five years at 12.00% interest. According to our credit card consolidation calculator, you’d pay $222 per month and save $5,253 in interest.
Are balance transfers a good idea? 4 questions to help you decide
Besides the obvious — that you should transfer balances only if you can lower your interest rate — what are some other things you should look out for?
Here are four questions to ask yourself before accepting a balance transfer offer.
1. Are the fees reasonable?
Most credit cards charge a balance transfer fee, which often equals a certain percentage of the balance transferred. It will be charged to your new credit card.
So if you’re transferring $10,000 with a 3 percent fee, you’ll need a credit limit of at least $10,300 to account for both the balance and the fee.
Look for a card without a balance transfer fee. If you can’t find one you qualify for, then do the math on other balance transfer cards. If the fees are greater than the interest you would’ve paid on the initial card, it’s not worth it.
2. Can you make on-time payments each month?
In many cases, if you’re late paying your bill for a 0% interest credit card, the promotional offer will end. That means the interest rate will jump to some insanely high rate, putting you in the same boat as before.
To prevent that outcome, set up an automatic minimum payment each month. If you want to pay more, you can log in and do so — but this way, you won’t ever be late.
Also note that the promotional interest rate likely won’t apply to purchases. In fact, most balance transfer cards start collecting interest on new purchases immediately, meaning you shouldn’t use your new card for anything other than housing your old balance.
3. Will you pay off your card before the offer ends?
In a perfect world, you’d pay off your entire balance before the end of the promotional period (and accompanying low interest). But the world is far from perfect, which is why it’s imperative to do the math.
As the earlier example showed, taking advantage of 12 months of 0% interest — and then continuing to pay the card for five more years — would save you nearly $5,000 of interest. On the other hand, paying it off during the promotional period would save you more than $8,000.
In that example, both situations save you money — but that won’t always be the case. If the numbers don’t add up, consider transferring only a portion of your balance or taking out a personal loan instead.
4. Can you avoid using the old card?
This is the most important question because you should pursue a balance transfer only if you won’t rack up more debt on the old card. The last thing you want to do is end up with two high-interest debts you can’t pay off.
To avoid damaging your credit, you shouldn’t close the old card — but you shouldn’t use it, either. If you can’t trust yourself, then put the old card through the paper shredder; it’ll still be open but unavailable for purchases.
If you answered yes to all the questions above, then a balance transfer might be a good option for you. If not, you might want to consider going a different route. Maybe a personal loan would be better for you.
Before choosing either path, though, you should take one important step: Create a budget and stick to it so you can avoid ending up in this situation again.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
3 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|5.81% – 15.37%1||$5,000 - $100,000||Visit SoFi|
|6.87% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%2||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%3||$1,000 - $40,000||Visit LendingClub|
|5.49% – 18.24%||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%||$2,000 - $35,000||Visit Avant|