If you’ve ever received a credit card balance transfer offer, you may have wondered what they are and how they can benefit you.
In short, a balance transfer is when you transfer the balance of one credit card to another—essentially paying off the first card with the second. Balance transfers can be a great tool for helping you save on higher-interest debt—but you’ll want to make sure you understand the details before making the jump. Here are 10 questions to ask when considering a balance transfer:
- What’s the benefit? Transferring your debt to a lower-interest card can help you save money and pay off debt faster. For instance, if you owe a large sum on a credit card with 13.99% annual interest, a 1.99% balance transfer offer on another card could save you hundreds or more over the course of a year.
- How much will it cost? Most financial institutions charge a fee for each balance transfer. Typically, the fee is around 2 to 5 percent of the balance transferred (so $100 to $250 on a $5,000 balance). Other fees, such as annual fees, may also apply to the account. However, some institutions, such as Navy Federal, don’t charge any balance transfer fees.
- Does the interest rate expire? Many balance transfer offers have a promotional rate for an initial period of time, usually from 6 to 18 months. After that, a low, teaser rate will likely change to a higher interest rate—so be sure to find out what the rate will be after the promotional period ends. In deciding whether or not to make a balance transfer, be realistic about your debt payments—will you be able to pay off your balance before that introductory rate expires? If you still have a balance after the promotional period, you could wind up paying more than you would have before the transfer.
- Does the interest rate apply to new purchases, too? New purchases may have their own interest rate. Check the offer details to see whether the promotional rate applies to other types of transactions as well. If it doesn’t, you may want to only use your balance transfer card for paying down your debt.
- Which balance do payments go to? If you have both a transferred balance and a purchase balance, both with different interest rates, most issuers will apply your minimum payment to the lowest-interest debt first, typically the transferred balance. The Credit CARD Act of 2009 requires issuers to apply payments above the minimum to the highest-interest debt first (generally new purchases). Ask your lender about its specific policy.
- What’s the limit? Some offers will include a limit on the maximum amount that can be transferred, while others will only be limited by your approved credit line. You can still make a transfer even if your current balance exceeds the offer limit, as long as it’s less than your credit line. In this case, you’ll have a remaining balance on your existing card and need to continue making payments there in addition to making payments on your new balance transfer card.
- Will it hurt my credit? A balance transfer could actually improve your credit score by increasing your available credit while reducing your overall debt. However, if you close the older account once it’s paid off, your score may temporarily decrease. That’s because part of your score is based on the age of your accounts, as well as the percentage of available credit you’re using. In some cases, it may be better to keep the first card open as you pay down debt—just be sure to pay the balance in full each month.
- Are there any other details I should keep in mind? If you fall behind on payments, your rate could rise, negating any potential savings. Also, be aware that you typically can’t use balance transfer promotions to transfer balances among different cards from the same financial institution. Read the fine print to determine how long you have to make a transfer in order to qualify for the teaser rate.
- Will I qualify? If all the numbers work and you’re ready to move forward, keep in mind that you still have to qualify. The lowest teaser rates may be available to those with the highest credit scores (typically in the 700s). Even if your credit score is lower than that, you may still qualify for a promotional rate that’s lower than what you’re currently paying.
- Can I transfer the balance again? If you haven’t paid your balance by the time the promotional rate ends, you may be tempted to transfer your balance again. While it can be done, frequently opening new accounts while maintaining high debt levels may negatively impact your credit score.