Key takeaways
- If you’re using a balance transfer, you should prioritize paying off the balance before the introductory APR period ends.
- If you’re unable to pay off the entire balance, you can still save on interest by paying as much as you’re able to during the introductory period when interest isn’t accruing.
- It’s important to make a plan for how to pay off the remaining balance when a balance transfer’s introductory period ends.
When I transferred a $5,000 balance on a Capital One account to a Bank of America card with a temporary 0% annual percentage rate in mid-2019, I swore to myself I’d pay off that balance before my zero-interest period ended.
And at first, I diligently paid several hundred dollars more than the minimum monthly payment during the 15-month interest-free window.
Then 2020 hit. Like the rest of the world, I panicked. I had no way of knowing whether I would find myself without a job. So I started making minimum monthly payments and hoarding money in savings. But November 2020 -- the date my zero-interest period ended -- loomed like a ticking time bomb in my head.
As a personal finance editor and certified financial planner, the notion that I needed to pay off my entire balance before the introductory period ended was drilled into my head. So I did. I paid off my balance a few days shy of when interest would start accruing. But I realize in hindsight that this alarm was unjustified. Even if I hadn’t made the deadline, I would have still saved hundreds in interest.
I’ve changed my tune on balance transfer cards. While you still need to use them responsibly -- they can get you into more debt if you’re not careful -- they can still be a helpful tool, even if you can’t pay off your full balance before the intro APR period ends. If you’re considering a balance transfer for your debt, here’s how to know if it’s the right call.
4 tips to make sure a balance transfer saves you money
Using a balance transfer card responsibly can yield big savings on interest, even if you can’t knock out the whole balance before your introductory rate ends. But to make sure a balance transfer actually saves you money, follow these tips.
1. Compare balance transfer cards
Your first move is to shop for a competitive offer. The best balance transfer cards offer an intro 0% APR for anywhere from nine to 21 months. Many credit card issuers require a good to excellent credit score, often defined as a FICO score of 670 or higher.
Though it’s possible to find a credit card with no balance transfer fees, they’re somewhat rare. A typical balance transfer fee is 3% to 5% of the amount you transfer. On a $1,000 transfer, that amounts to a $30 to $50 fee.
You can also look at your existing credit cards to see if you have any balance transfer offers available. But the interest-free period may be shorter or you may not get a 0% APR. Many issuers reserve their best balance transfer options for the first 45 to 60 days after you’ve opened a card.
You typically can’t transfer a balance to a credit card from the same issuer, so I wouldn’t have been allowed to transfer my Capital One balance to a Capital One balance transfer card. Many issuers also have balance transfer limits, so you may not be able to transfer your entire balance.
2. Calculate fees vs. interest savings
Once you’ve identified a few good candidates, you’ll need to calculate the fees you’ll pay against the potential interest savings. No one likes paying credit card fees, but a one-time balance transfer fee often pales in comparison to a typical credit card APR.
For example, if you’re carrying a $5,000 credit card balance on a card with a 20% APR, you’d accrue about $1,000 in interest over a year if you made only the minimum payment. So the $150 to $250 transfer fee you’d expect to pay might well be worth it.
To estimate your savings, calculate your budget for monthly payments. Using the $5,000 example above, here’s how you’d determine the potential savings:
- Calculate the cost: If you transfer a $5,000 balance to a card offering an introductory 0% APR for 12 months and pay a 3% fee, you’ll ultimately need to pay off $5,150.
- Budget for your monthly payment: Next, determine how much you can afford to spend on paying down the balance. In this example, we’ll assume you’re allocating $300 a month for payments.
- Figure out how much you’ll save during the promo period: Compare what you’ll pay in interest during the temporary APR if you transfer the balance against what you’d pay if you didn’t initiate a balance transfer. In the above example, you’d pay $0 in interest over the first 12 months. Assuming the initial card had a 20% APR and you were making $300 monthly payments, you’d save around $748 on interest during those 12 months.
You’d still have a balance of $1,400 at the end of the 12-month introductory period. But considering that you paid a $150 fee to save $748, the balance transfer is probably worth it, even if you couldn’t pay off the whole amount in time.
CNET Money staff writer Toni Husbands discovered this fact when she used balance transfers to help pay off $26,000 of credit card debt. She and her husband paid off their first balance transfer card two months after the 0% APR ended. Though they were charged some interest, it was minimal. That’s because their remaining balance was significantly lower than it would have been otherwise, thanks to 13 months of no-interest payments.
3. Look beyond the transfer APR
Figuring out the interest savings from a balance transfer card is a little tricky, though. That’s because there are several APRs you need to know:
- Intro balance transfer APR: The temporarily lower interest rate you’ll pay on the amount you transfer. Often, but not always, this is 0%.
- Purchase APR: The promotional APR you get on the balance you transfer may not extend to purchases you make. Check the terms and conditions of the credit card offer to see if interest will start accruing immediately on new purchases.
- Regular balance APR: The amount you’ll pay in interest once the temporary APR ends. If you’re not confident you can pay off your credit card during the lower-interest period, this number is especially important.
Credit card interest rates are usually variable, which means they fluctuate. That means the regular balance APR you see may change by the end of the promo period. But if the regular APR on the new card is substantially higher than the rate you’re paying on your existing card, weigh the pros and cons of a balance transfer carefully. If you expect to have a large balance remaining when interest kicks in, the move may not be worthwhile.
If you’re comparing two balance transfer cards with similar APRs, opt for the one with the longest intro period. You’ll give yourself more time to make interest-free or low-interest payments.
4. Avoid going deeper into debt
A balance transfer card can save you money on interest. But if you don’t make it part of a larger debt payoff plan, the savings might not have a meaningful impact on your overall finances.
To get the most out of a balance transfer, avoid making new purchases using the card. This is a good guideline even if your card offers a low APR or a 0% APR on new purchases. The goal is to lower your debt, rather than add to your balance.
It’s OK if you’ll still have a balance at the end of the intro period given the potential interest savings. But if you have extra room in your budget, consider allocating it toward your monthly payments while that temporary APR is in effect to maximize your savings.
If a balance transfer helps you lower your credit card debt, your credit scores will probably benefit. The reason? Your credit utilization ratio, or the percentage of revolving credit you’re using, determines up to 30% of your credit scores, depending on the scoring model.
But multiple balance transfers could be harmful. Opening several new credit accounts within a short window can cause your credit scores to drop. Also, if you’re using balance transfers for temporary relief without addressing your spending, you won’t improve your overall financial health.
What to do if you still have a balance at the end of a balance transfer period
If you know you’ll still owe your credit card company at the end of a balance transfer period, you have options. Here are some strategies to consider.
Lump sum payment
If you have money sitting around in a savings account, using that money to pay off your balance once interest charges start racking up again could be a smart move. Even if you have one of the top high-yield savings accounts, the interest you earn is likely paltry compared with what you’re paying on an interest-accruing credit card.
Debt consolidation loan
A debt consolidation loan lets you consolidate multiple debts into a single personal loan. You can often save money on interest and simplify your finances since you’ll have only one monthly payment. But be sure to compare the savings not just on a monthly basis but over the life of the loan. A long repayment period could cause you to pay more in interest overall. And check for fees so you can factor those into the total amount you’ll pay.
New balance transfer card
It’s generally possible to transfer a balance multiple times, so a new balance transfer card could be a solution if you have a balance when your temporary APR ends. But be mindful of the potential credit score impacts. If overspending is keeping you in debt, a new balance transfer card is unlikely to be helpful in the long term.
Credit counseling
If you’re overwhelmed with debt, consider getting credit counseling. Look for a nonprofit agency that’s a member of the National Foundation for Credit Counseling or the Financial Counseling Association of America. A credit counseling agency can help you learn about money management. They may negotiate lower monthly payments with your creditors on your behalf and help you avoid having accounts sent to collections.
However, they can’t make your debt disappear. So be wary of any company that claims it will make your balance go away or tells you to stop making payments.
The bottom line
There’s no doomsday clock that starts ticking when you get a balance transfer credit card. If you don’t pay off the entire debt when the temporary APR ends, you’ll pay interest on the remaining amount. But the remaining amount will probably be a lot lower than it would have been otherwise because more of your payments will go toward principal instead of interest.
Look for a long intro period, as well as the lowest fees possible. But know that even if you can’t eliminate the balance by time the lower-interest period ends, a balance transfer could still save you money, reduce your debt and improve your financial picture.
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