The Multiple Benefits of Balance Transfer Credit Cards
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Financial tools come in numerous forms, from budgeting apps to using rewards cards to earn points or miles for free travel. When you are filling your financial tool chest with beneficial artillery, transferring your existing credit card balance to a balance transfer credit card could become a valuable addition.
A balance transfer is when you move one debt to another account. In this case, we are specifically referring to taking advantage of a balance transfer introductory credit card offer where you receive 0% APR for a designated promotional period is where you can find the most value. Most of these 0% APR offer an introductory period from six months to as high as 21 months. As you set out to discover what makes the most financial sense for you, these offers are certainly worth a second look.
Related: Best Balance Transfer Cards
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Benefits of balance transfer credit cards
Transferring your existing credit card debt (and, in some cases, your personal loans) offers multiple advantages — if the conditions are right for your personal finances. Let’s look closer at where you could see the most benefit.
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Save money on interest
One of the most obvious benefits of transferring existing credit card debt to a 0% introductory offer — such as the 18-month 0% APR introductory period for balance transfers with the Citi Double Dash card — is the potential to save money over time on interest. How much you save depends on your current credit card balances and interest rate, but you can use all of this information to calculate the amount of your potential savings.
Let’s walk through an example of how much money you could save.
If you had a transfer amount of $6,000 in credit card debt at a current rate of 18% APR and typically paid $300 per month as your minimum monthly payment, it would take 24 months for you to pay off the balance. Additionally, you would pay $1,186 in interest charges over these 24 months.
However, if you took advantage of a 21-month 0% APR introductory period, such as the current balance transfer offer from the Wells Fargo Reflect card. Assuming you paid the same $300 per month, your $6,000 balance would be paid within 21 months, and you would have paid $0 in interest charges. In this case, you would save $1,186 with a balance transfer.
As a side note, a balance transfer typically includes a balance transfer fee, usually 3% to 5%. In this scenario, a 3% balance transfer fee would equal $180, so your savings would be $1,186 minus the $180.
The most important takeaway here is yes, you can save money on interest, but to truly see the savings, you need to run your scenarios with a credit card payoff calculator and factor in any balance transfer fees.
Related: Best 0% APR Credit Cards
Reduce the time it takes to pay off debt
Another major benefit of transferring debt to a 0% APR introductory offer is that it can lessen the time to pay off your debt. When your goal is to become debt-free, getting there as quickly as possible, any time you can shorten your repayment timeline is good. The sooner you can pay off your debt, the sooner you can focus on your other money goals.
In the scenario listed above, not only was there significant savings in interest, but it shortened the payoff time from 24 months to 21 months. Three months may not seem like a significant amount, but it’s much more money in your own pocket and much less in the hands of the credit card company. I know which one I prefer to keep my money in!
Debt consolidation for simpler budgeting
Another advantage of consolidating multiple credit card balances into one account — preferably one with an introductory offer — is reducing complexity in your finances. Only making one monthly payment versus several lessens your mental load and gives you one or two fewer things to remember to do each month.
Not only this, but it decreases the chances of you missing a payment, which results in added late fees. You increase your chances of maintaining responsible financial behavior.
Debt consolidation can be a major financial win if you lock in a lower interest rate, even once the introductory period is over.
Increase your credit score in the long-term
In the long run, your using a balance transfer credit card. This happens for a couple of reasons.
For starters, your credit score should increase if you’re responsible with your payments and make your on-time payments each month, thanks to the simplicity of budgeting for one payment. Your payment history is 35% of your FICO credit score, so it’s worth focusing on this whenever you can.
Secondly, your credit utilization score can decrease, which helps improve your score too. Credit utilization is the amount of credit you use versus the amount of your extended available credit. When you consolidate your credit card debt to a new balance transfer credit card while keeping your other credit cards open, you decrease your overall credit usage. Ideally, this number needs around 30% or lower to impact your credit score positively.
Related: How Does Your Credit Score Compare?
The new credit card may offer additional perks
A balance transfer to a new card may mean more than an intro APR or low interest rates. It could also offer better rewards or perks than what you currently can access. There is a lot of competition for credit cards, and card issuers often include other bonuses that would normally be an out-of-pocket cost for you, such as no annual fee.
A balance transfer credit card offer may make even more sense when you choose a card with bonuses, such as a rewards program or a chance to earn cash back. You may receive consumer protections such as roadside assistance, travel insurance, rental car insurance, and purchase protections, which are also money-savers.
You may also be entitled to a 0% interest rate for a limited time on new purchases, not only the balance transfer. In other words, numerous other advantages may make transferring your balance to a new card a better option for you.
Related: Best Rewards Credit Cards
Raise Your Credit 80 points*
- 5 star service trusted by over 450,000 members
- Have processed over $11,000,000 in bill payments for members
- No deposit, no credit check, no interest
- New member promotions available
*Potential increase based on StellarFi member data. StellarFi numbers observed an average of 80 points VantageScore® 3.0 increase during a member’s lifetime. Score increase based on members with an incoming score range of 300-499 pts, who made regular on-time payments, with regular on-time payments. Results may vary.
Before you take on a balance transfer credit card
While a balance transfer credit card has several benefits, using this as a financial move takes careful consideration and planning. There are both pros and cons of balance transfers you should take note of before you proceed.
Higher fees
Balance transfer cards typically include many fees. For starters, you have a balance transfer fee ranging from 3% to 5%. The more you transfer, the more you pay. It’s plain and simple. But this isn’t the only place where you’ll be paying more.
Often, the regular APR you pay when the introductory period is over can be higher than your current interest rate. Or, the lenders may charge a variable APR, which fluctuates and makes it harder for you to plan payments if you carry a balance.
Other fees could include exceeding your credit limit and late and foreign transaction fees. This should all be factored into your decision before you apply.
You could incur more debt
If careless, you could incur more debt than when you first consolidated. This could happen if you miss a payment and forfeit your introductory APR or as outlined in your card’s payment terms.
Another scenario is you could still owe a balance at the end of your introductory period, which means you’ll be subject to interest charges on the remaining balance. Between these interest charges and the balance transfer fee you initially paid, you could be looking at a more expensive proposition and not one that saves money.
Your credit score matters
The best balance transfer credit card offers are extended to those with good or excellent credit. If you have a poor or fair credit rating, it doesn’t mean a balance transfer isn’t possible. It simply means you may not have as many choices available, and you may need to apply for a secured card option instead.
Your credit report will be pulled, which results in a hard pull that shows on your credit report for up to two years, but the impact should be minimal. Ultimately, your credit score is a major part of the decision-making process for lenders.
Raise Your Credit 80 points*
- 5 star service trusted by over 450,000 members
- Have processed over $11,000,000 in bill payments for members
- No deposit, no credit check, no interest
- New member promotions available
*Potential increase based on StellarFi member data. StellarFi numbers observed an average of 80 points VantageScore® 3.0 increase during a member’s lifetime. Score increase based on members with an incoming score range of 300-499 pts, who made regular on-time payments, with regular on-time payments. Results may vary.
The bottom line
A balance transfer credit card, particularly one with a lower interest rate than what you’re currently paying and a 0% APR introductory rate, could be what you need to streamline your finances and save a significant amount on interest over time. The key is to run the numbers before you move, so you can ensure it is in your best interest and can assist you in your financial goals.
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Writer
Sara Coleman is a former corporate gal turned creative entrepreneur. She began writing professionally several years ago and now contributes to multiple websites, blogs, and magazines. She’s also an avid reader and can’t resist a great historical fiction novel. Sara holds a BA in journalism from the University of Georgia and can be found supporting her Bulldogs every chance she has. She resides in Charlotte, North Carolina, with her wonderfully supportive husband and three children. When she’s not ushering her kids to sports and dance lessons, she can be found creating content for her own website, TheProperPen.com.
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