Transferring credit card balances from high-interest to low-interest cards can save money, simplify your payments, and allow you to pay your debt faster. Whether it's worth doing or not depends on your current interest rate, the length of the low interest rate period, and the fee to transfer the balances.
Why transfer credit card balances?
Simply put, transferring your credit card balances allows you to avoid paying the massive interest rates charged by most credit cards. For example, if you owe $20,000 in credit card debt at 18% interest, you're paying $300 per month just for the privilege of owing the money. In other words, if your minimum payment is $450, just $150 of that goes toward paying the balance.
By transferring to a card with a 0% introductory APR, your entire payment is applied toward reducing the balance, and can help you get out of debt faster. Here's a calculator that can show you your potential interest savings if you were to transfer your credit card balances.
In addition to the interest savings, transferring your balances can help you simplify your finances, and put all of your credit card debt in one place. In my previous example, if that $20,000 in credit card debt is spread out over four different credit cards, you could have four different monthly payment amounts due on four different dates each month. Consolidating your debts onto one card can simplify the process.
Is it worth doing?
Whether or not it's worth it depends on a few factors. First of all, it's important to realize that the vast majority of cards that offer 0% APR on balance transfers charge a fee. Typically, this is equal to 3% of the amount you transfer, or a certain minimum ($10 seems to be common). So, if you transfer $20,000 in debt, this translates to $600 tacked onto the principal. Although it's less common among balance transfer cards, if there is an annual fee associated with the new card, that needs to be considered, too.
Also important is the length of the introductory APR period. This can range from just a few months to nearly two years, depending on the particular credit card you're applying for. I'll mention a few examples in a bit, but 12- to 18-month introductory periods are the most common, while the best I've seen is 21 months.
Perhaps most important is your reason for transferring. The main benefit to a 0% interest period is the ability to pay down your debt before the interest kicks back in. You don't necessarily need to pay the entire balance down to make transferring a good idea, but if you just make the minimum payments, you're simply delaying the interest for a later date.
Finally, if you're not planning to pay the balance in full during the introductory APR period, it's important to consider the regular (non-introductory) APR offered by the credit card. After all, it would be silly to make just the minimum payments during the introductory period, only to be stuck paying an interest rate that's higher than the one you transferred the balance to get away from in the first place.
Some good options to consider
It's worth noting that obtaining a credit card that allows for 0% balance transfers generally requires a reasonably good credit score. While the required minimum scores for each card aren't published by the credit card companies, most want to see that you don't have any late payments, charge-offs, collections, or judgements on your credit history.
If you do have a good credit history, here are a couple of the best balance transfer credit cards on the market today.
First, the Citi Simplicity card is the 21-month 0% APR card I was referring to earlier, and is actually the one I used to pay off debt I incurred some time ago after buying and furnishing my house. The card does have a 3% balance transfer fee ($5 minimum), and has no late fees or penalty APR.
Another good example is the Chase Slate, which to my knowledge, is the only card with no balance transfer fee, as long as you make the transfers within 60 days of opening the account. The introductory period is for 15 months from the opening date, and just like the Citi Simplicity, the Slate has no penalty APR for paying late. Neither of these examples charge an annual fee.
This isn't an exhaustive list, and there are plenty of good offers for balance transfers, so shop around.
The Foolish bottom line on balance transfers
Transferring credit card balances can be a smart idea if it's done properly. In other words, the 0%-interest window should be used as an opportunity to aggressively pay down the balance while your entire payment goes toward the principle, as opposed to just a way to delay paying the debt. If you're committed to getting your credit card debt under control, a balance transfer could be the right move for you.
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