Read This Before Applying for a Balance Transfer Credit Card

This article was updated on June 23, 2018.

People who understand how balance transfers work can use them to pay down debt while paying less (or nothing at all!) in interest.

People who go in blindly, however, risk coming out in worse financial shape than they came in, building up high-interest credit card balances greater than what they started with. 

Here are two things everyone should know before applying for a balance transfer credit card. 

Balance transfers can save you a boatload in interest, but only if they're used wisely. Image source: Getty Images.

1. How payments are allocated

Let's say you transfer a $10,000 balance to a new credit card to take advantage of a 0% interest rate. You also use the card for routine expenses and put $1,000 of purchases on the card in the first month. The card doesn't have a promotional APR for purchases, and thus the purchase APR is 18%.

So how much do you need to pay this month to ensure that you aren't charged any interest on your card? The answer is the card's minimum payment plus the purchase balance of $1,000.

The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 requires that any payments in excess of your minimum payment are applied to the highest-interest-rate balance. This allows credit card companies to apply the full amount of your minimum payment (probably $330 on this particular card) to the 0%-interest balance you transferred, rather than the purchase balance, which accumulates interest. In our example, if you just paid the minimum payment, your new balances would look like this:

At this rate, you'd rack up a lot of interest charges before paying off the transferred balance and starting to pay down the purchase balance. An easy solution to this accounting problem is to apply for a balance transfer credit card that has a 0% introductory period for transfers and purchases. Chase Slate®, Citi Diamond Preferred, and Citi Simplicity all offer just that, which is why we regard them as some of the best balance transfer credit cards of 2017.

The other solution is to simply avoid using a card for purchases if the card is for balance transfers. It's a foolproof way not to end up confused about what part of your payment will be applied to which balance.

2. Pay a transfer fee only when it is worth it

The typical credit card charges a fee equal to $5 or 3% of the amounts transferred, whichever is greater. This means that someone who transfers a $5,000 balance would pay $150 in balance transfer fees to take advantage of a 0% interest rate. (In practice, this means the $5,000 balance on one card would grow to $5,150 on the new card upon transfer.)

But don't assume that a balance transfer fee is inevitable. Chase Slate® offers 0% interest on balance transfers for 15 months and does not charge a fee on balances that are transferred in the first 90 days.

Paying a fee is only advantageous when you need additional time to pay off your balance. Citi Simplicity offers an incredible 0% introductory APR on balance transfers for 21 billing cycles (six more months than Chase Slate®), but the extra time comes at the cost of a 3% transfer fee. That said, a 3% fee for six months of zero interest works out to an annualized interest rate of about 6%, which isn't as good as zero but is way better than paying the ordinary interest rate on another card.