Can Balance Transfers Save Me Money Even with a Transfer Fee?
If you have received an offer for a 0% APR credit card or a rate lower than what you are currently paying, you may be tempted to open the account and transfer your current balance. There are credit cards which are specifically designed for balance transfers to help you save money on interest fees from other high interest credit cards you may have.
However, there are a few things to consider before applying for that new credit card. Depending on the terms, it may or may not be as good of a deal as it seems.
Is it an introductory rate? Does that rate apply to purchases, balance transfers, or both?
First, you will want to read the fine print to see if the interest rate is only good for an introductory period. Card companies make money by charging interest, so it may be obvious that you will not pay 0% interest forever. However, even interest rates above 0% may be introductory. If you have received an offer for a credit card that charges 3.99% interest, make sure that APR will be your new fixed rate. If the interest rate will go up after the introductory period, check to make sure the ongoing APR is lower than what you are currently paying.
If you plan on using the card for a balance transfer, check to make sure the card is specifically designed for balance transfers. Some credit card offers may have a 0% or low introductory rate, but that rate may only apply to new purchases and not to balance transfers. If your purpose for the new credit card is specifically to transfer balances from other high interest credit cards you may have, we have put together a list of the best balance transfer credit cards with low or 0% introductory balance transfer APRs.
How fast can you pay off the debt?
This next question is especially important if the interest rate is for an introductory period only. The most compelling reason to transfer your balance is to pay off your debt sooner and save money on interest costs. Before opening the new account, you will want to put together a realistic budget to see how much you can afford to pay toward your debt each month. Then, do the math to see if this will be enough to entirely pay off your credit card balance within the introductory period.
For example, if you have a $10,000 balance on other credit cards but your interest rate is 15.99% and you took 18 months to pay it off, you would pay a total of over $1,300 in interest. However, if you were to find a card with a 0% introductory period on balance transfers for 18 months and transfer that balance, then pay off the card over that 18 month period, you would effectively be saving yourself over $1,300 in interest.
In this same scenario, if you were to transfer the balance but did not pay it off during that period, after 18 months you may find yourself in the same or a similar situation to where you started. Additionally, if you continue to make new purchases on the card or add more debt than you started with, you could in the long run pay even more in interest.
Make sure you have a sound financial plan for how to utilize the balance transfer card, as transferring your balance can save you money but only if you aggressively pay off the card within the introductory period.
How much is the balance transfer fee?
While a handful of cards do not charge balance transfer fees, you will usually be charged 3% to 5% of the amount transferred. Thus, if you move $10,000 to your new card, you will be charged between $250 and $500 in fees. This balance transfer fee is charged as soon as the transfer is made, so this fee, along with any interest you will be charged, should be taken into account before deciding whether to open the new account.
Many consumers only look at cards with no balance transfer fee, but this may not always be the best offer. For example, if a card has a 0% intro rate for 18 months but charges a 3% transfer fee, you may be better off paying this transfer fee than applying for a card that has a 0% intro rate for only 9 months but has no balance transfer fee. It’s important to do the math and find the best offer for your situation based on the amount of debt you plan to transfer and based on your anticipated payoff date. This will help ensure you save the most on interest and fees over the life of the card.
Can you transfer the full amount?
Another consideration is whether you can transfer your full balance. Sometimes, the new card issuer will not offer a credit limit high enough to cover the entire balance on your old card. In this case, your savings may be minimal, depending on how much of your balance you can transfer and the amount of the balance transfer fee.
While you may not always know the amount you will be approved of ahead of time, it’s important to read the details of the card’s fine print and see if there are any explicit limitations. Additionally, if you apply for a card and are approved for a limit lower than you would like, try calling the issuer and explain your situation. Sometimes they will review your situation and credit profile to determine if they can further increase your credit limit to facilitate a larger balance transfer. While this is not the norm, it is a step worth trying that could save you hundreds or even thousands of dollars in interest and fees.
So should I make the transfer?
While there are a number of calculators online that can help you make the final decision, we will run through two scenarios to demonstrate when a transfer would be helpful and when it would not.
Say you have been offered a credit card with 0% APR for an introductory period of 18 months and a balance transfer fee of 3%. You plan to transfer $5,000 and can pay about $300 each month, which means you will pay off the card during the introductory period. If your current card charges an interest rate of 9%, even when the balance transfer fee is taken into account, you will save over $400 in interest. In this case, it is wise to your credit and your wallet to transfer the balance.
But let’s look at a slightly less optimistic scenario. You are still transferring $5,000 to a card with a 0% introductory rate, but the introductory period is only 6 months (after that, it will be the same interest rate you are already paying, which is 9%). You will pay a 5% balance transfer fee, and you can only afford to make the minimum payment (which will be about $200 per month). In this scenario, you will actually lose money by transferring your balance.
As these two scenarios demonstrate, it takes just a few changes to transform that balance transfer from a great deal to a bad one. Thus, it is important to read the terms and conditions and crunch the numbers before you even consider opening a new card.
Be sure to continue making payments on your old card!
If you do decide to transfer your balance, continue to make payments on your old card until the amount has been transferred. It can take up to three weeks for your new credit card to pay off your old card, and you do not want to miss a payment during this period, as it could hurt your overall credit.
In addition, make every monthly payment on your credit card on time. If you do not, issuers can immediately cancel your introductory offer, causing you to lose the opportunity for a 0% APR.
So can balance transfers save me money even with a balance transfer fee?
Absolutely! The interest savings alone is substantial depending on the size of your balance. Don’t shy away from cards that have a balance transfer fee, as sometimes these cards will have the longest introductory APR on balance transfers. The reality is that you are usually paying far more in interest than you would with the balance transfer fee, so it is important to do the math for your particular situation to determine what card is best for you.