Choosing the best balance transfer card for you boils down to three factors:
- The issuer that holds your current debt. In general, you can’t transfer debt between cards from the same issuer. So you couldn’t transfer debt from, say, the Citi® Double Cash Card – 18 month BT offer to the Citi Simplicity® Card - No Late Fees Ever.
- The balance transfer fee. Most cards — but not all — charge you a fee to move a balance from another card.
- The promotional 0% APR period. Balance transfer cards give you a certain amount of time to pay off the transferred amount without interest. Typical 0% APR periods are 12 to 15 months; some cards go even longer.
Start by identifying which issuers you can and can’t transfer debt to, depending on where that debt currently resides. From there, you have to consider both of the remaining factors — and compare them to the cost of keeping your balance on your current card — to get the full picture on whether a particular balance-transfer card is a cost-efficient way to pay off your debt.
When picking a balance-transfer card, ask yourself these questions:
1. How much is the transfer fee?
Transfer fees, typically 3% to 5% of the balance being transferred, are the most obvious cost associated with transferring a balance. Most cards simply tack the fee on to your balance, rather than make you pay it upfront, which can make the fee easy to ignore. But it’s money you have to pay.
Depending on the size of the balance you’re transferring and the interest rate you’re currently paying on it, the fee could add a significant amount of money to your debt — possibly enough to wipe out the interest savings from the 0% APR period. Not all cards have transfer fees, but the majority do.
2. What’s the promotional APR?
The appeal of balance-transfer cards is the promotional 0% APR period. In general, the longer the promotional period, the better, because you have more time to pay off the balance without interest. That means your payment can go entirely to reducing your debt.
Keep in mind, though, that promotional APR periods are just that — promotional. Once your time is up, the interest rates will make a big jump, maybe even to 20% or more. Make sure you know exactly when your card’s promotional-APR period ends to avoid accruing even more debt. A balance-transfer card should be a tool to help you pay off your debt — not a place to stash your debt and ignore it.
3. Are the savings worth the transfer fee?
This question depends on the answers to the first two, and it’s what ultimately determines whether you should transfer your balance at all. If the balance-transfer card you’re considering comes with no transfer fee, then you don’t really need to ask yourself this question: You’re guaranteed to save money so long as you get the debt paid off within the 0% APR window.
But let’s say your prospective card has a transfer fee of 3% and a 12-month 0% APR. The balance on your current card is $3,000 with an APR of 20%. Regardless of whether you transfer, you plan to pay the balance off in equal payments over 12 months:
- Transferring that balance incurs a $90 fee, but you pay no interest. Cost of the balance-transfer card: $90.
- Keeping the balance on your current card incurs no fee, but you’ll pay a total of $3,335 in combined principal and interest. Cost of not transferring the balance: $335.
In this case, the interest you’d pay will have exceeded the transfer fee, making the transfer worthwhile. Of course, if you’re going to be carrying some of the balance past the end of the 0% APR period, that could change the equation significantly.
Other balance transfer considerations
There are other, less apparent costs associated with opening up any new line of credit. Most new hard credit inquiries (like those that occur when you apply for a credit card) trigger a slight reduction in your FICO score. Reducing your average age of accounts with a new credit line can also pull your score down slightly. However, having a larger pool of accessible credit may reduce your credit-utilization ratio, which could raise your score.
The point is, any time you open a new line of credit you should at least be aware of the impact it has on your credit score. Beyond that, making a decision about a balance transfer card is a matter of running the numbers. If moving your debt to a new card will save you money, applying for a balance transfer card may be the right move for you.
This post has been updated. It was originally published Sept. 21, 2013.