Balance Transfer Tips for Saving on Credit Card Interest

Credit card payments are an ongoing issue in most households. If you don’t pay the balance each month, those credit cards will start accumulating interest fees, and suddenly you can find yourself with much higher monthly payments than you budgeted for. What’s worse, over time the cost of those interest fees can add up to more than the actual charges. To avoid paying high credit card interest rates, many people make a balance transfer to another card that offers lower or no interest. This can be a good strategy that will save you money in the long run, if you understand the pluses and minuses of a balance transfer.

If you’re worried about your growing credit card debt, you’re not alone. U.S. credit card debt surpassed $1 trillion in 2018. Americans also paid $110 billion in interest charges and fees in 2018, and are expected to pay $122 billion in interest in 2019, partially because of accumulated debt and partially because of rising interest rates. Credit card APRs currently are averaging 16.86%, a 4% increase over five years, and they are expected to climb further as the Federal Reserve raises interest rates. 

That’s the big picture. Most U.S. households carry about $7,000 in credit card debt (i.e., revolving credit card balances that are carried from month to month). Over five years, a $7,000 credit card balance at 17% APR will cost you an additional $5,820 in interest. The problem for most households is that they have trouble paying down their credit card balance.

Depending on your situation, a credit card balance transfer may help you gain control of your credit card debt. A balance transfer is a strategy in which you use the credit available on one credit card to pay down another card. This strategy works only if you can substantially reduce your credit card interest charges and get terms that allow you to pay down the debt over time. There are a number of credit cards promoting themselves specifically for balance transfers, but you need to understand what terms they offer and what you should be looking for:

Determine if a balance transfer makes sense. Using a balance transfer to move your debt from one card to another is typically a strategy for credit card debt that you plan to pay over time. If you think you can pay off your credit card in less than six months, then a balance transfer doesn’t make sense; you will likely pay more in transfer fees than you will in interest.

Know the terms of your current card. Before making a balance transfer, be sure you know what the APR is on your current card. You want to make sure you transfer to a card with a substantially lower interest rate.

Shop for the best interest rate. When shopping for a new credit card, you want to find a card that offers low or zero interest charges on balance transfers. This means that the new card won’t charge interest on amounts transferred from another card for a period of time. Also be sure there are no annual fees or hidden fees.

How long is the promotional transfer period? When you transfer a balance to a new credit card, it usually offers a promotional rate for a fixed period of time, typically 13-20 months. The longer the transfer period, the more time you have to pay off the debt before accumulating interest fees. After the promotional transfer period, many cards charge much higher interest rates on the transferred balance.

How much is the transfer fee? While you can get low or zero APR rates, balance transfers usually incur a fee, normally 3-5% of the amount transferred. For example, if you plan to transfer $5,000 and the transfer fee is 3%, that would be an added cost of $150 in transfer fees. When calculating your repayments, be sure to include the cost of the balance transfer.

Keep up on your payments. While you are waiting for the balance transfer to go through, be sure to stay current on payments for your existing credit card. Also remember that you are not eliminating your debt with the balance transfer; you are merely moving it to save on interest fees. Be sure you can make payments on both your existing credit card and your new credit card.

Watch your credit score. To get the best transfer rate, you need to maintain a relatively high credit score. Note that even though applying for a new credit card may require a hard inquiry and have a negative impact on your credit score in the short term, it could raise your credit score in the long run. Your credit utilization ratio (i.e., how much you owe versus how much credit limit you have available) is an important factor, and with a new credit card, your credit score may go up because you have more available credit.

When shopping for a balance transfer card, you also want to consider other benefits, such as cash-back benefits or bonus points. iQ Credit Union, for example, has a Visa Platinum Rewards card that offer zero transfer fees and no annual fee, and earn you 1% cash-back on purchases. With a competitive APR, the cash rewards could help you reduce your overall debt even faster.