What You Must Know Before Transferring Credit Card Balances

By Miranda Marquit. Last updated 7 November 2012. 1 comment


Before you take the plunge, though, you need to know exactly what you are getting into. Learn how balance transfers work, and how your credit score and your financial future can be affected. (See also: 5 Best 0% APR Balance Transfer Credit Cards)

How Balance Transfers Work

If you are carrying a balance on a credit card with a high interest rate, it can be difficult to pay down your balance. Your high interest charges mean that a smaller portion of your payment each month goes toward reducing the principal. Transferring the balance to a lower interest helps overcome this problem.

Transfer Balance to Lower Interest Rate

First, you apply for a new credit card. Generally, when you perform a balance transfer you look for a credit card that has a 0% introductory rate. Most credit card issuers offering a 0% balance transfer rate ask for information about your current credit account. The new credit card issuer pays off the old card and takes on the balance.

How Long Is the 0% APR Offer Good For?

The lower interest rate you are offered on your debt probably isn’t permanent, though. Most balance transfer interest rates are limited-time propositions, so your 0% rate goes away after 6, 9, 12, or 18 months.

The advantage to the 0% rate on balance transfers is that now your entire payment goes toward the principal, so you pay down your debt faster. Instead of having your payment eaten up by interest charges, it does more good toward getting you out of debt.

Is the Balance Transfer Fee Worth the Interest Savings?

Remember, though, that most balance transfers aren’t free. Many credit card issuers charge a fee that amounts to between 3% and 5% of the balance you transfer. Do the math on your balance. Is the fee big enough that your interest savings will be offset by the cost? The risk of a fee that is bigger than your interest savings is most likely with a shorter introductory period, especially if you are transferring a large balance.

Even if a balance transfer seems like a slam dunk, you still need to be careful; the way you perform a balance transfer could reduce your credit score.

Will a Credit Card Balance Transfer Affect Your Credit Score?

Because a balance transfer deals with credit, it is important to consider the impact your action will have on your credit score. A credit card balance transfer can have positive and negative impacts on your score, depending on your situation.

Did You Cancel Your Old Credit Card?

Before you cancel your high interest credit card, consider the impact it will have on your debt utilization (also known as “debt-to-credit ratio” or “debt-to-limit ratio”), as well as the length of your credit history. If you have had your old card for a long time, canceling it might not be the best move for your credit score.

Does the New Card Have a Lower Limit?

Your debt utilization is the second most important factor for your credit score. The more debt you have in relation to your available credit, the lower your credit score.

If your new card has a lower limit, and you cancel your old card, you could see a lower score. If you transfer your $5,000 balance from a card with a $8,000 limit to one with a $6,000 limit, your utilization suddenly jumps from 62.5% to 83.3% if you cancel your old card.

How Many Inquiries Have You Made?

If you have applied for several credit cards in your quest for a 0% APR balance transfer, your score can be dinged. The more you apply for credit (even if you are rejected) the bigger the chance that your score will be negatively affected.

Are You Planning to Pay Offf the Balance Quickly?

Once you complete the balance transfer, paying down your balance quickly can boost your credit score. As you pay down your debt, your credit utilization moves into better territory, and that will help your credit score.

Do You Expect to Use Your Old Credit Card?

Don’t clear off your old card just so that you can “free up” the funds for more spending. Using your old card while you still have a big balance on your new card is a recipe for a declining credit score.

How Often Do You Transfer Balances?

Believe it or not, credit card issuers pay attention to how often you transfer balances. If you hop around a lot, credit issuers will catch on. Soon your offers will dry up. And, if you hop around a lot within a period of a few months, that could trigger a drop due to inquiries.

Carefully Consider Your Balance Transfer Plan

Ultimately, the impact your balance transfer has on your credit score depends on the actions you take during and after the balance transfer process. Your balance transfer should be carefully considered and planned for.

For example, even though canceling your older card can negatively impact your credit score, it’s a relatively small effect — only 15% of your credit score is related to the length of your credit history. If you don’t think you can curb your spending (because you have now freed up a big chuck of available credit), the small hit from canceling your card is better than the bigger hit that comes from increasing the amount of debt you have.

Your credit card balance transfer has the most positive effect on your score if you are approved after one application, and if you can keep your old card while you quickly pay down the balance on your new card.

Playing balance transfer roulette can have negative effects on your credit score. If you are constantly applying for new cards and shifting your balance around every few months, that starts to show on your credit report. That will bring your credit score down, especially if you make more purchases with each old card as it is “freed up.”

Without the right planning, balance transfers can just help you rack up more debt. Remember that your old card, now that it has been paid off, doesn’t represent “free money.” It just represents the potential to borrow more. If you are truly trying to get out of debt, you can’t start spending on your old card just because your balance transfer gave you more room.

6 Tips for Transferring Credit Card Balances

As you attempt to transfer your higher interest rate balance to a new card, it’s important to be on your toes. Credit card issuers aren’t offering these deals because they like you. You need to make sure you do what’s best for you.

Here are some helpful tips for a better balance transfer.

1. Create a Plan to Pay Off the Balance

Remember that the credit card issuer hopes that you won’t pay off the balance during the introductory period. 0% APR balance transfer offers are designed to get you to move your money so that you will pay the regular rate later. Make a plan to pay off the balance as quickly as possible.

2. Don’t Assume You Qualify for the Best Rate

In some cases, you might not receive the 0% offer. Instead, you might receive a slightly higher rate. Someone without good credit might end up with a 1.99% or 3.99% balance transfer rate. Know your credit situation going in, so there aren’t any surprises.

3. Pay on Time, and Don’t Go Over Your Credit Limit

If you miss a payment, if you are late, or if you go over your limit, the credit card issuer can rescind your 0% APR before the end of the intro period. Make sure you are a model consumer during your intro period.

4. Consider Other Credit Card Features

Don’t just apply for the first 0% APR balance transfer card you see. Look at other card features, including whether or not there is an annual fee or whether there is a rewards program. Be a little picky as you look for the right balance transfer card.

5. Read the Fine Print

Understand the terms and conditions. Some cards offer a 0% balances transfer but will still charge interest on new purchases.

Also, make sure you understand how the balance transfers are charged. If you plan to consolidate smaller high-interest balances to one larger balance, you might be charged a separate fee for each balance.

6. Compare Offers Before Making a Decision

Before you apply, compare various balance transfer offers. Be sure that you are getting the right balance transfer — and the right credit card — for your situation.

A Great Way to Jump Start Debt Reduction

A credit card balance transfer can be a great way to jump start your debt pay down plan. You do need to be careful, though. Compare the costs of a credit card balance transfer with the benefits.

In many cases, a balance transfer can be a good tool for getting your debt under control and paying it off faster. However, if you aren’t careful, and if you don’t change your habits, a balance transfer can result in even more debt, as well as a lower credit score.

If you are looking for a good card to transfer your credit card balances, check out Wise Bread’s picks for the 5 best 0% APR balance transfer cards.

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Also important to consider: if there's a balance transfer fee, make sure you factor that into your cost/benefit calculations. If you're transferring a balance from a 4% APR card to a 0% APR for-one-year card with the idea you'll pay it off over the course of the year, that's great. But if you have to pay 4% off the top to transfer the balance, then you've washed any savings.