How to Choose the Best Balance Transfer Credit Card

If you currently have a balance, try to avoid fees and interest rates as long as you can. There are a few tricks and traps to watch out for, though, mostly in the form of fees. Also, if you don’t carry and don’t plan to carry a balance, you can take advantage of your good credit with a rewards or airline credit card.

Be on the lookout for:

• High interest rates once the introductory period ends
• Balance transfer fees, which can be as high as 5%
• Penalty interest rates and late payment fees. The penalty APR can top 25%, while the late fees can be as high as $35.

To understand whether or not you’re likely to get a good balance transfer deal, and to understand what pitfalls to look out for, it’s first important to understand just how credit card companies make money off of your balance.

1. Interest rate spread. The primary mechanism is by making a “spread” on interest rates – for example if Capital One borrows money at 3%, and then turn around and loan you money at 13%, they make 10% a year on your entire balance, as long as you pay it off. They judge how likely you are to pay back the money based off of your credit.
2. Balance transfer fee. In almost all cases, a credit card with a 0% introductory balance transfer rate is going to come with an upfront balance transfer fee of 3% to 5%. Cards without an introductory balance transfer deal usually do not have a balance transfer fee. We take this into account on our interest rate calculations.
3. “Whoopsies” penalty fees & other fees. The most important fee to beware of is the dreaded late payment fee, ranging from <$20 at most credit unions, to around $35 at the major for-profit banks. Be sure to call in and whine if you are a first time offender – most banks will remove the fee once. However, if you are always forgetting to pay your bill on time, you might want to consider going with a credit union! The other big fee to watch out for is the “Penalty APR”. Many credit card issuers jack up interest rate to near 30% if you are 60 or more days delinquent on paying your required minimum balance.
4. Applying your payments to low interest balances first. The CARD Act of 2009 forces card issuers to apply payments above the minimum payment to the highest interest balance first. This is a very positive step, but it still means that your minimum balance will be applied to the very low interest rate introductory balance, rather than any new balance you rack up at the card’s normal interest rate.

As you can imagine, card issuers trip over each other to loan money to people with good credit – they pay their debts and are willing to put up with high interest rates. This competition between card issuers leads to crazy introductory offers, such as 0% for 18 months with a 4% balance transfer fee upfront. If you take advantage of this offer, make sure you don’t fall prey to the “whoopsies” fees and penalties.

On the flip side, it’s tough getting a loan if your credit score makes you look like a default risk to card issuers. If you’re in this boat, there are still options out there, they just tend to come with higher interest rates and/or higher fees. If you have a high debt utilization ratio (you have a lot of debt compared to your credit limit), a history of missed payments or a lot of recent credit inquiries, your credit score’s probably taken a hit. You may need to use a secured credit card to build up your credit score to qualify for a good balance transfer card. We recommend the Orchard Bank card, since the bank doesn’t care what your credit score is as long as you can post a deposit.