Manage Debt With a Credit Balance Transfer

Posted January 04 2017
by PenFed Team
smiling woman at laptop with credit card

With gifts to buy for family and friends, and holiday meals and social events to host and shop for—all in addition to the regular bills you need to pay—the end of the year can put a lot of stress on your budget, bills, and finances. If you’re struggling with debt after the holiday season, it may be time to consider a credit card balance transfer.

What’s a balance transfer?

Essentially, a balance transfer is when you use available credit from one credit card to pay off other balances. The idea is that you would get a new credit card account with low or no interest (typically for an introductory period), move debt from your existing account (or accounts) to the new one, and then make payments on that new account.

If you’re transferring balances from multiple accounts on to one, you’re doing a lot to simplify your finances. Additionally, if you’re transferring balances from credit cards or creditors that charge a much higher interest rate, you’re also scaling back on the the interest you pay towards those balances and monthly payments. Because the interest is lower, you can pay less per month to keep more cash in your pocket while still making progress on your debt—or you can keep making the same payments you’re accustomed to, and bring down your debt more quickly.

And the overall benefit to you? You’re bringing down your debt load and giving yourself more financial flexibility.

Is a balance transfer always the best choice?

If transferring credit card balances were so simple, no one would ever carry a balance on a high interest rate card. Before you start searching for low interest credit cards to transfer to, you should be aware that transferring your credit card balance may not always be the best financial choice for you.

Why? There’s a fee. Typically, when you transfer a balance to another credit card, a balance transfer fee most often applies—on average up to 3% or more (though some financial institutions may waive that fee). Depending on how much you’re transferring, the interest rate of the card you’re transferring from and what the fee is, that fee could negate, or at least minimize, your savings.

If you’re considering conducting a balance transfer, you’ll want to factor in the following:

  1. First, you’ll want to do the math by calculating what you’ll end up paying in interest before you pay off your debt.
  2. Second, you’ll want to consider how much you’ll save if you transfer and consolidate all your balances onto a new card.
  3. Third, make sure you thoroughly understand the terms and conditions of the offer. You’ll want to know how much the balance transfer fee will be, and when the balance transfer promotional rate expires.
  4. Fourth, you’ll need to take into consideration your credit. You’ll typically need good credit to qualify for the best balance transfer offers. While doing the math on a balance transfer may sound good with the best available interest rates, if you don’t qualify for those rates it may not save you any money.

With all these factors in mind, sometimes making a balance transfer is a smart financial move, and sometimes it isn’t.

What you need to know before transferring

So you’ve run the numbers and decided it makes sense to do a balance transfer—but hold on, because you can still make some big financial missteps if you are not careful. Here’s what you need to know:

  • You still have to make payments on those zero percent interest offers. Even though there’s no interest accumulating, you still have to make minimum monthly payment to the card. You’ll want to make sure you pay on time—not only to keep your credit score in good shape and to avoid possible penalties, but to ensure you do not loose that introductory or special promotion offer.
  • Don’t run up more debt on the old credit card you just paid off. Just because your credit card isn’t maxed out doesn’t mean you should start running up more debt—if you do, you’re only digging yourself deeper into debt.
  • Don’t close your old credit card, either. Part of your credit score is calculated based on the amount of your available credit that’s in use—your credit utilization. For example, let’s say you had a $5,000 balance on a credit card with a limit of $10,000. Presuming that’s your only available credit, your overall credit utilization is 50%. If you open a new account with an additional limit of $10,000 to conduct a balance transfer, your overall credit utilization drops to 25%—which is much better for your credit score.
  • Always read the fine print. If you’re taking advantage of special offers, they’ll have a set duration. If you have an offer that waives paying a balance transfer fee, then there’s usually a set period of time allowed to make that transfer. If you have an offer for zero percent interest, that interest rate will eventually expire. Make sure you know the exact terms and conditions of the balance transfer offer—and don’t miss any deadlines.