Are Balance Transfers Worth It?
LowCards is a Citi partner. These offers, valid when the article was written, may have expired. View our full editorial disclaimer here.
Many consumers are flooded with direct mail offers from credit card companies, where issuers dangle 0% interest rates for a substantial number of months if consumers simply transfer the balance from their existing card.
These “balance transfer” offers are extremely tempting. But are they worth it?
They can be a very good way to cut down on a significant amount of interest penalties. On the other hand, they may be a costly way of simply moving your debt from one card to the other if you don’t pay off the existing debt in a timely manner.
Calculate Your Savings
When making your decision on whether to do a balance transfer, you first need to do a mathematical calculation. Take a look at the length of the 0% introductory offer on the potential new credit card. For the sake of discussion, let’s say it is 15 months. You need to calculate how much interest you will pay on your existing credit card debt with your current issuer during the next 15 months. You could save that amount of money if you transferred the balance from your current issuer to this new card with that introductory offer.
However, you must deduct the balance transfer fee that the new card may assess. Most cards charge a balance transfer fee of 3% on the amount you transfer. The exact amount is found in the card’s terms and conditions. So if you were transferring $5,000, a balance transfer fee of 3% would cost you $150.
Subtract the amount of the balance transfer fee from the potential savings resulting from the interest charges and you have the net amount you will save by transferring the balance.
Other Factors to Consider
Here are some other factors to keep in mind:
* Make sure you analyze the ongoing APR of the new card you are considering. Determine how this interest rate compares to your current card. If it is too much higher, it may not be worth the risk. You need to take an honest assessment on how long it will take you to pay off your credit card debt.
* Once you transfer the balance, try to pay off your full balance during that introductory period. Have this marked on your calendar and do everything you can to pay off the entire balance by this date. Then you will not be subjected to the ongoing interest rate on the new card.
* You MUST make sure to make your payments every month on time. If you are late for any payment on your new card, you will most likely forfeit your 0% introductory rate and will immediately begin paying the ongoing APR. This defeats the reason you transferred the balance in the first place.
* In addition, always pay at least the minimum monthly payment. Do not pay less at any time or this could lead to the loss of your 0% introductory APR.
* Keep your credit score as high as possible at all times, especially during this introductory period. You don’t want to give the issuer any reason to increase your ongoing APR due to a costly mistake that lowers your credit score.
* You may be tempting yourself to incur more debt. After all, you will now have two credit cards, including your existing card which might not have any balance on it. If you are not financially disciplined, you may be tempted to rack up more debt.
* Speaking of temptations, some balance transfer cards offer 0% APR on new purchases for a period of time. This is the issuer’s way of luring you to make more transactions on that card. They are betting that you won’t pay off all your debt during the introductory period. A good rule of thumb: don’t make any purchases on a card that you use for a balance transfer until you have the entire balance paid off.
* Most balance transfers require the cardholder to have a good or excellent credit score. If you do not have an excellent credit score, your ongoing APR may be higher than the advertised rate.
* Your new card’s credit limit may not cover all of your existing debt on your current card. In that case, you have to decide whether it is worth the potential fees to transfer just a portion of the debt to the new card.
* Along those same lines, the new issuer may not allow you to transfer all of your existing debt, but rather just a portion of it. Check the new card’s fine print to see if there is a cap on the amount you can transfer.
Here are some of the best balance transfer cards on the market today:Citi Simplicity® Card – No Late Fees Ever has one of the industry’s best introductory offers in terms of APR. The Citi Simplicity card has a 0% introductory APR for 12 months on purchases, and for 21 months on balance transfers that are made in the first four months of being a cardholder. Subsequently, there will be an ongoing APR between 14.74% - 24.74% (Variable). There is a 5% balance transfer fee. This card is rather unique in the industry in that it has no annual fee, no late fee and no penalty rate.
Citi® Diamond Preferred® Card has the same attractive introductory APR as the Citi Simplicity card. The 0% introductory APR is for 21 months on balance transfers (must be made within the first four months of card membership) and 12 months on purchases. Then, an ongoing APR between 13.74% – 23.74% (Variable) depending on your credit worthiness. There is no annual fee on this card but there is a 5% balance transfer fee on the amount transferred. The Citi Diamond Preferred card has a very attractive perk for the frequent traveler: 24/7 concierge service to help book your hotel rooms, flights and other travel details.