In a perfect world, no one would carry a balance on their credit card. We would all pay our bills in full each month and never have to worry about dealing with interest charges or ballooning minimum payments.
But the reality is that overspending happens, sometimes through no fault of our own. If you’re facing a mountain of credit card debt, doing a balance transfer might be a good way to make it disappear faster.
Transfer a balance, save big on interest
The idea behind a balance transfer is simple: You open a new credit card with a low interest rate and move the balance from your old, high-interest card to the new one. Essentially, this means that the debt on your old card has been paid by the new card. After you complete the transfer to the new card, you can start paying it down; this is much easier to do when your interest payments have been drastically reduced.
To illustrate how much money you can save by transferring a balance, let’s assume you had a credit card debt load of $10,000 and that the card is charging you 15.99% interest. With this level of debt, your monthly minimum payment would be about $232 (this depends on how your credit card issuer calculates your minimum payment, but for the purposes of this example, we’ll use $232). Even if you were making twice the minimum payment, it would take you 26 months to pay off the debt and you’d wind up paying $1,867 in interest.
But if you transferred your balance to a card that offers 0% interest for 15 months (which is possible — more on that in a minute) and continued paying twice the minimum, you’d pay off your card in 22 months with only $162 in total interest payments. That’s a savings of $1,700!
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Don’t forget balance transfer fees
By now you’re probably thinking that transferring a balance sounds like a great idea, and in many cases it is. But there’s something else to factor into your calculations — the balance transfer fee.
A balance transfer fee is a charge imposed by the bank whose card you’re moving your debt to. This is not a flat fee; it depends on how much money you’re transferring to the new card. It’s common to see a balance transfer fee expressed as “$10 or 3% of the balance transferred, whichever is higher.” Also, balance transfer fees are paid up front, as soon as you shift your debt onto the new card.
A 3% charge might not sound like much, but if you’re transferring a large balance, it can really cut into how much you’re saving by making the switch to a lower-rate card. In the example above, if you transfer a $10,000 balance onto a 0% card that charges a 3% balance transfer fee, you’re not really saving $1,700. You’re saving $1,400, because you will have had to pay a fee of $300 to complete the transfer. This is still a substantial savings, but it’s not as impressive as it initially seemed.
A few cards don’t charge a balance transfer fee for a certain period after you open the account, or at all.
Decided to do a balance transfer? Here are some tips for success
If you’ve decided that a balance transfer is the right way to deal with your debt, here are the Nerds’ tips for success:
- Look for a card that offers a long 0% APR period and doesn’t charge a balance transfer fee.
- If you can’t qualify for one that meets both these criteria, think carefully about paying a balance transfer fee versus paying interest. Choosing the one that makes the most sense for you depends on how big your balance is and how long you think it will take to pay off, given your resources. If you’re not sure how to conceptualize this, this resource will put you on the right track.
- Be as disciplined as possible about paying off your debt before the interest-free period is up.
- Don’t cancel your old card — this could hurt your credit.
- Make it a priority to pay on time every month. If you miss a payment, your 0% deal will likely be canceled and you’ll have to start paying interest right away.
- Avoid the cardinal balance transfer sin: moving your debt to a new card, then charging the old card back up. If you do this, you’ll have negated the benefits of the balance transfer and landed yourself in even more debt.
The bottom line: A balance transfer can save you big bucks if you look for the right card and follow our tips for success.
This article has been updated. It was originally published April 1, 2014.