(Article update in October 2018)
A zero rate balance transfer card is a powerful tool when it comes to debt repayment. When used correctly, you can save hundreds of dollars as you pay off your credit card debt bit by bit. But choosing the right balance transfer card can be tricky – make sure the introductory period is on the higher side, balance transfer fee is low, the new APR is either 0% or negligible, and the credit limit of the balance transfer card is high enough to accommodate your debt from another credit card.
We look at each on of these in detail so you can make the best decision for yourself.
What is a balance transfer card and when should you get one?
A balance transfer card is a kind of credit card with a special feature that allows you to repay your debt quickly. The card issuer of a balance transfer card permits you to transfer your outstanding credit card balances from other credit cards (sometimes by the same issuer) and promises to charge you a 0% interest rate on your debt, or a very low interest rate, for a limited time period. This way you can pay off one credit card with another credit card, while enjoying a lower cost of debt. The biggest advantage of zero-rated (0%) balance transfer cards is that you do not accrue more debt in the form of interest rate charges even if you fail to fully pay off the credit card bill each month.
Essentially, as soon as you transfer your debt from the regular credit card account to a balance transfer card account, interest rate charges cease to apply. This means your debt balance does not rise each month, even if you fail to clear the balance out entirely. This allows you to save lots of money while you try to repay your debt during the introductory period. There are certain caveats you should be aware of, such as the length of the introductory period, the balance transfer fee, minimum payment requirements and the order of payments that the credit card holder has specified. We cover these below.
What is the introductory period and introductory APR in a balance transfer card?
The introductory promotional period is one of the things that differentiates a balance transfer cards from typical credit cards. We know that a balance transfer card is a promotional tool for banks to attract new customers by promising a very low, if any, interest rate on their credit card debt provided they transfer their debt onto the balance transfer card. However, the ‘low interest or interest free’ feature is only for a few months, known as the introductory period. The interest rate charged during the introductory period is called the introductory/promotional APR.
The introductory period may vary from 6 months to a 18 months (a year and a half) and once the promotional period of 0% interest rate has expired, a standard/higher interest rate is applied to your remaining debt. This new rate and the duration of the introductory period is stated in the disclosure section of each balance transfer card you wish to apply for.
What to watch out for with the introductory/promotional period of balance transfer cards
- The zero-rate (0% rate) offer expires: Once the introductory period expires, all outstanding debt will begin to accrue interest charges and the new rate may be higher than the rate charged on your previous credit card. Ideally, you will have repaid your entire debt down to zero before the promotional period ends. However, in case there is still an outstanding balance at the end of the introductory period, you will have saved a lot of money if you had paid down a large part of your debt, especially any high-interest rate loans.
- The introductory period and introductory APR will vary depending on your credit score: If the credit score or credit rating of the card applicant is low, the advertised interest rate and introductory period may be a lot more attractive than the interest rate actually charged once the debt has been transferred. The length of the introductory period that applies to different credit scores is mentioned in the disclosure section of the credit card agreement.
- New purchases on the balance transfer card may be charged a standard interest rate: when applying for a balance transfer card, check the fine print for disclosures about whether the 0% interest rate applies to the debt you transfer, as well as any new credit lines (purchases or cash advances) that you open through the balance transfer card. If the promotional interest rate is only applied to the transferred credit balance, you can still save money with the card by not making any purchases through it so your debt does not accrue any additional interest charges.
What is a balance transfer fee and how much is it?
A balance transfer fee is a one-time transaction cost/charge that is applied to your credit card when you move your debt to the card. This is actually a commission that the new card issuer charges upon receiving your debt. The balance transfer fee typically varies from 1.5% to 5% (sometimes less and sometimes more) and this information is stated in the credit card disclosure section along with other charges that may apply to you (all mentioned in the fine print).
The balance transfer fee can be negotiated, fortunately, just like you can negotiate your credit card interest rate, which we talked about in another article. The total amount of this fee is added to the debt on your credit card and you must pay it back along with the rest of the debt before the promotional period expires to avoid accruing interest on it.
What to watch out for with balance transfer fees
- The balance transfer fee can make the card an expensive option: The fee can go up to 5% (or more, depending on where you live). If the debt you plan to transfer to the new card is large, you could end up paying a lot of money simply for the transaction. Be sure to calculate the balance transfer fee before you move your credit card debt to understand the true cost of debt repayment. Read the fine print in detail to determine whether the balance transfer card you have chosen is beneficial or more expensive than your current credit card.
- The balance transfer fee may vary: This fee can change depending on when you transfer the funds after obtaining the card. Some credit card companies charge lower balance transfer fees if the debt is transferred soon after receiving the card, and the fee goes up if you delay the transaction by a few months. This is a promotional tool that encourages new customers to transfer their funds quickly to the balance transfer card. Consider moving your debt sooner, rather than later, to make use of the lower transfer fee.
- The balance transfer fee may nullify the benefit of a low APR: To determine if you will actually save money by moving your debt to the balance transfer card, you need to calculate the entire cost of repayment, which includes the balance transfer fee and any other fees that you will be charged (stated in the fine print of the credit card agreement).
- The balance transfer fee may depend on the credit score of the card holder: If the card issuer advertised a very low balance transfer fee of, say, 1%, it is possible that the actual fee will be higher because of the applicant’s low credit score. The actual balance transfer fee that applies to different credit levels is stated in the disclosure section of the credit card agreement.
Do balance transfers affect your credit score?
Whenever you apply for a balance transfer card, your credit score takes a hit. This naturally impacts your ability to get new debt at low interest rates, while many lenders/creditors do not allow consumers with low credit scores to borrow at all.
Fortunately, there are many ways to increase your credit score, and one of them is to make all your credit card payments on time, each month.
Credit limit of balance transfer cards
All credit cards have a maximum limit for the amount of debt you can carry on that card, and balance transfer cards are no different. You may transfer debt from a number of different credit cards onto the balance transfer card as long as you are below the credit limit. This cap on the amount of debt protects financial institutions from losing too much money, and helps consumers by limiting the amount of purchases they make through the credit card, which will lead to more debt.
When looking for the right balance transfer card, choose one with the appropriate credit limit for your debt.
Read about the order of payments on balance transfer cards
Banks offer balance transfer cards to help consumers repay debt faster but they also try to ensure there is a real chance of making a profit from this card through various fees and by specifying which debts can be paid off first in the debt portfolio held on your card. In most cases, consumers must clear the lowest-interest-rate balance first and the highest-interest-rate balance last.
In other words, if you have 2 loans with interest rates of 10% and 15%, you may be required to pay off the loan with the lower interest rate of 10% first. In some countries, banks are legally required to reverse this arrangement so that consumers pay off balances with the highest interest rate first, and this delivers greater benefit to the card holder.
Minimum payment rules on balance transfer cards
Consumers with large amounts of debt may be tempted to retain the debt, instead of repaying it, when it has been moved to a balance transfer card because of the low cost of holding that debt. This may be detrimental to the consumer, and is not beneficial for banks either because it means they do not recover their money. For these reasons, banks require that a ‘minimum payment’ is made each month and the terms and conditions for this are very strict.
The minimum payment must be made consistently to continue enjoying the low APR on your debt. While your goal is to pay off the entire sum of debt during the introductory period by surpassing the minimum payments, it is possible that you will face a cash flow crunch at some point in time, and make a partial payment of the ‘minimum payment value’.
Missing a minimum payment or making a partial payment of this value on a balance transfer card may result in a higher, standard interest rate on your outstanding debt, effectively eliminating the benefit you initially sought from the card. Again, read the fine print to determine the consequences of missing a minimum payment on your balance transfer card.
How to do a balance transfer
Here is a quick review of the procedure:
- Do some research to find the ideal balance transfer card with the lowest possible interest rate (or none at all), an appropriate credit limit, low balance transfer fees and long introductory period.
- Apply for the new balance transfer card. It may be issued by the bank that has issued your current credit card, or a different bank. Avoid applying for a large number of new credit cards at once because it can harm your credit score.
- When the card arrives, transfer your balance as soon as possible to make use of lower balance transfer fees. For the transfer, you will have to request your old credit card company to transfer the debt from the old credit card to the new zero rate balance transfer card. This usually takes a few hours to complete.
- Close your old credit card account if you do not wish to retain in. The balance transfer does not automatically close your old account. Note: retaining old credit card accounts can improve your credit score.
It takes a few hours for the transfer to go through to the new credit card but the entire process of getting a new balance transfer card can take around 2 weeks to complete and until then, interest charges will continue to accumulate on the old credit card with the outstanding balance.
Can you transfer a credit card balance more than once?
Consumers may simply switch to an alternative balance transfer card after the introductory period has expired so they can continue holding on to their debt without accruing any interest charges. This isn’t necessarily a good tactic. To prevent this and save themselves from losses, balance transfer card issuers have a few features and rules in place:
- A balance transfer fee deters consumers from frequently moving their debt to new cards after the teaser/promotional rate expires,
- The disclosure section of the card may reveal that under the contract, consumers are simply not permitted to move their debt to another balance transfer card within a certain time frame,
- Many balance transfer card issuers have a minimum credit score requirement that automatically prevents people with low credit scores from using them, and as we mentioned earlier, if one keeps moving their debt to different balance transfer cards, their credit score will fall.
Are balance transfer cards the best way to pay off credit card debt?
Once you have gone through this article, you may feel that given the right circumstances, balance transfers cards may be a good way to get rid of credit card debt. To determine whether balance transfer cards are the right choice for you, you must weigh the benefits against the risks.
While the 0% interest rate feature prevents your outstanding debt from increasing each month, there are plenty of risks and downsides too, such as late payment penalties, the fall in your credit score and the risk of facing a really high interest rate once the introductory period is over. When used correctly, these types of credit card have the potential to save you hundreds of dollars while you pay back your debt. Read about the benefits and downsides of using balance transfer cards and whether you should consider getting one.
Which balance transfer card should you get? How to choose the right one
If you have decided, after thorough analysis, that you wish to pay off your credit card debt using a balance transfer card, your next step is to decide which one to apply for. Figuring out which zero rate balance transfer credit card to apply for is a task that requires a bit of research on your part to determine the best possible deal. Compare cards based on the following basis:
- Credit limit: The balance transfer card should have a sufficient credit limit, which is the maximum amount of debt you are allowed to carry on that card, to incorporate all or most of your high-interest rate debts from other credit cards,
- Length of introductory period: The introductory period should preferably be more than a year to give you ample time to repay your debt on the balance transfer card while the interest rate is 0%,
- A 0% introductory APR: The introductory interest rate should be 0% or very low to deliver significant savings. Often, the advertised APR of 0% is only for applicants with good credit levels and it is possible that the actual interest rate on your card is higher than the advertised rate,
- The balance transfer fees: The balance transfer fee should be very low or non-existent to make the card a viable option,
- Consequences of missing one minimum payment: There should preferably be some leeway in this regard,
- Order of payments: There may or may not be a debt repayment order you have to follow to enjoy the promotional APR. This should preferably be left up to you or favor high-interest debt,
- Standard interest rate: This is the interest rate that will apply to your debt after the introductory period has ended, and should preferably be lower than your current credit card’s interest rate,
- Other details mentioned in the fine print: The disclosure section of the balance transfer card covers details about extra charges and limitations that apply to you.
The last tip about reading the fine print is very important when it comes to comparing balance transfer cards because it will help you understand the risks you are undertaking, the consequences of missing a payment, and the result of not fully repaying the debt once the 0% promotional rate has expired.
In summary, balance transfer cards are an attractive way to get rid of credit card debt but only under the right circumstances. As always, consumers need to thoroughly analyze each agreement document to determine what kind of risks they are undertaking when using a balance transfer card.
Remember that you can negotiate certain terms of the balance transfer card before you begin to use it, so don’t be afraid to call up the customer service hotline and ask them to lower the balance transfer fee or extend the introductory period. You can use this detailed negotiation script for dealing with credit card companies.