Credit card companies offer all sorts of "welcome gifts" to entice consumers to apply for their cards. One of the most common is special interest rates on balance transfers, and some cards won't charge you any interest on transfers for a year and a half.
So, if you have a lot of credit card debt, is it a good idea to transfer your balances to a new card to reduce the amount of interest you'll pay? Like most other financial decisions, there are pros and cons here, so let's see if it's the right move for you.
Interest savings, even after the fees
Some, but not all, credit cards with balance transfer offers charge a "transfer fee," which generally runs 3%-4% of the amount you move. If you transfer a $2,000 balance, expect to pay $60-$80 when the balance transfer is complete.
However, this might be a small price to pay compared to the alternative. Even if your current credit card has a relatively low interest rate, say 12.99%, a $2,000 balance will cost you about $260 per year to maintain.
If you look hard enough, you can find offers without any fees. For example, all of the major cards offering 18-month 0% balance transfers seem to charge a 3% fee, while the Chase Slate card offers a slightly shorter time frame (15 months) without any transfer fee. If you think you'll be able to pay off the balance three months earlier, an option like this can save you money.
You can compare some of the current balance transfer offers here.
Could it raise you credit score?
Maybe. Thirty percent of your FICO credit score (the score most widely used by lenders) comes from a category called "amounts owed." A balance transfer won't reduce the dollar amount of money you owe, but it could definitely help you out here.
"Amounts owed" refers not to the actual dollar amounts you owe, but to the amount you owe relative to your total available credit. In fact, many people with lots of credit card debt have fantastic credit scores.
If you owe $4,000 on your credit cards and have a total limit of $8,000, you're using 50% of your available credit. If you were to open a new credit card with a $5,000 limit and transfer your balance onto it, you're now only using about 30% of your enhanced total credit line.
Most experts recommend keeping your total credit use under 30% at an absolute maximum, so if you're using more and can't afford to pay down a big chunk of it, a balance transfer could indeed boost your score.
What about your old cards?
If you transfer your balance, then close your old cards, the net effect on your credit should be a wash. In fact, any impact on your credit score could be negative, as the new card will produce an inquiry on your credit, which could drop your score by a few points.
Balance transfers are most effective when you consolidate your debt onto the new card at 0% interest and then leave your existing accounts dormant. This gives you the best of both worlds: not only could your score benefit from lower use of your available credit, but you'll also pay no interest on your debt (for a while).
Are you an easy victim of temptation?
Whether transferring your credit card balances is a good idea for you really comes down to how easily you give in to the temptation to spend.
If you're one of those people who has $9,900 in credit card debt simply because your limit is $10,000, maybe opening a new card and increasing your credit line is not the best move.
On the other hand, if you manage your debt well and don't charge a lot of purchases simply because you can, there is a pretty good case to be made for taking advantage of a good balance transfer offer.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool owns shares of JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.