Figure out how much you need to transfer
Before you do a balance transfer, you need to know how much you want to transfer. If you have multiple credit cards with balances, you might be better off consolidating it all into one balance. Or you may have excellent rates, so you may only want to move bits and pieces of your debt.
Regardless, the first step to doing a balance transfer is figuring out exactly how much to move. Remember, there are costs involved in doing this, so you’ll have to decide what’s worth it and what isn’t.
When you’re looking for which balances you want to transfer, the first thing you should target is the annual percentage rate (APR) that you’re paying on each of the balances, regardless of how high your balance is. The APR determines how much you pay in interest every month on the balance you carry over and is the primary reason most people do balance transfers—to get a lower rate.
So for example, if you have a $5,000 credit card balance at 15.99 percent APR, you might want to consider finding a better card to transfer that balance to. But if you’re like my friend and have a 2.99 percent lifetime rate on a certain credit card, odds are you won’t do much better than that, so you’re best to leave that balance where it’s at.
After you’ve gone through all your credit cards and determined exactly how much you would like to transfer, it’s time to get more realistic and figure out how much space you have to do one.
Determine how much “cap space” you have on each card, or apply for a new one
Now that you know how much you need to transfer, it’s time to find out where you can move it to. There are pros and cons to opening a new card, so I’ll start with that.
Opening a new card
By applying for a new credit card, it’ll count as a hard pull on your credit report. A hard pull on your credit will result in a hit to your credit score (usually only a few points, but it can vary widely based on your credit situation).
Opening a new card will also lower your average length of credit history—which factors in the age of all your accounts (adding a brand new card will reduce the average age overall slightly). Both of these are negative factors to your credit score.
On the positive side, you tend to get the best offers for a balance transfer on new cards. Typically introductory offers, these cards will give you a great balance transfer rate for a specific period, then move you to the standard rate on the card (more on this below). You may also get a bonus for signing up for a new credit card.
If you go this route, you technically have the entire credit line to utilize—but you may not know exactly what that is until you get approved. I’ve seen customers approved for less than they want to transfer, which may put you in a bind.
For instance, you may have $20,000 that you want to transfer to the new card but are only approved for a $10,000 line. This leaves you with about $10,000 that you’re unable to transfer, so you’ll either have to find another place for it, call the credit card company and ask for a reconsideration on your credit line (which these days won’t happen very often), or keep the balance where it’s at.
Using an existing card
I would recommend you use an existing credit card if you can. If you use an existing card, you’ll already have an established history, and you can get some pretty good offers. Plus, you’ll already know exactly how much of your credit line you have available. On the downside, you may not have as many options as you think, and I would avoid using a card with an existing balance on it, as it’ll just make things messy.
If you’re carrying a balance on the credit card and still want to use it for a balance transfer, there are a few things you should know.
First, the way your payment is allocated has changed. It used to be that your payment would go to the balance with the lowest APR first—which would essentially lock customers into not being able to pay off higher balances until they paid off their promotional balance transfer rate. The CARD Act fixes this and allocates your payment to the highest APR first.
Second, you want to make sure to read the terms very carefully when you do this. Some credit card companies will give you a great promotional rate, but then move the remaining balance to a very high-interest rate (i.e., consider it a cash advance) if you don’t pay it off in full by the time the promotion ends. Read the terms and conditions carefully.
Find the best offer on each card
By now you’ve figured out how much you want to transfer and found a few options for doing the transfer. Now it’s time to look for the best offer.
Most new credit cards will give you a standard offer, as low as 0 percent when you sign up for a new account. As I stated above, make sure to read the terms and conditions carefully, as that may be the best rate you can get—but not necessarily the rate you will get. Meaning, if your credit score doesn’t qualify for the best rate, you may get stuck with a different promotional offer by the time the credit card company approves you.
Compare your options and check for any hidden costs
Now you’ve gotten to the phase of actually choosing the best offer. Keep in mind; this is the best offer for you. What may be a great deal for one person may be a terrible option for someone else.
There are a couple of things you need to consider when you’re taking a balance transfer:
What the promotional rate is.
This should be the first thing you look at. What is the offer, and how much will you save each month?
Looking at my offers above, you can see that one is for 0 percent and the other is 4.99 percent.
Another thing you need to consider is the rate compared to the length of the promotional offer.
For example, a 2.99 APR (annual percentage rate) on an offer that is only good for nine months isn’t 2.99 percent. It’s a bit higher when you consider that you only get it for nine months.
What the transfer fees are.
This is a common hidden cost to balance transfers. As you can see in the offers above, Offer one comes with a three percent transfer fee.
This means that if I transfer $10,000, I’ll get hit with a $300 fee right off the bat—so my balance will be $10,300 at 0 percent.
Offer two has no transfer fee, but the interest rate is higher.
How much time you’ll need to pay it back.
A balance transfer is just a promotion—it usually doesn’t last forever.
My advice would be to think about how much time you need to pay all (or at least most) of the balance back before the promotion ends.
If you’re getting a big bonus at the end of the year and need a short-term tie-over, then you may be good with a shorter duration (which would typically give you a better rate).
On the other hand, you may need a longer period, which would typically be at a higher rate.
It all depends on what your current and future financial needs are, so think about that before you choose.
How much you can afford each month.
Find out how much the minimum payment will be after you transfer your balance before you go through with the transfer.
Some banks charge a higher percentage of your total balance for the minimum payment, which could impact your ability to pay back (or even afford) the debt.
For instance, one bank I know of calculates their minimum payment as 1 percent of the total balance plus interest.
Another bank uses 2 percent plus interest. That may not seem like a lot, but it’s effectively doubling your monthly payment.
Figure this out up front, so you don’t get yourself into a financial jam.
What the rate goes to after the promotion ends.
This is critical—and as you can see above, my promotional rate will revert to 20.49 percent (an outrageously offensive rate, by the way) after the promotional period ends.
At this point, whatever balance is left over goes to this rate, and I can either pay it off (if I have the money) or transfer it to another card.
Keep in mind that banks pay attention to people who flip balances around constantly.
They’re what’s known as rate surfers and will eventually see no promotional offers come their way since they cost banks money in the long-run.
Set up the transfer and a plan for payback
Usually setting up a balance transfer requires nothing more than a few clicks of a mouse when you’re logged into your account online. My Discover offer above requires that I pick the offer, enter my account numbers of the accounts I want to transfer (they’re giving me up to four) and clicking a button to approve.
Discover will take a few days to make payments to those creditors electronically, and the balance will magically show up on my account in about a week. Pretty magical, right?
Once you’re en route to a nice, new, shiny balance, you need to think about a plan to pay it back.
As I recommended before, I would do a balance transfer if it makes financial sense for you, but also only if you can afford to pay it back in time.
If I transferred $20,000 at 0 percent using Offer one above, I’d not only pay a $600 transfer fee, but I’d only have the balance at 0 percent for 12 months. After that, it’d go to 20.4 percent (whatever balance was left). Not a good situation.
I mentioned rate surfers above—this doesn’t mean you can’t do a couple of transfers to pay your debt off.
You have to be strategic about it. If you abuse balance transfers and continuously add to your debt, the offers will dry up. But if you take the right approach and use transfers to pay your debt off (yes—that’s what this is for, not to open up your credit limit for more purchases), then you can get away with two or three balance transfers.
The thing to consider, though, is that you don’t know what, if any, offers will be available for you when you’re ready to do another one.
My advice is to set up a plan to pay off most or all of the debt by the time the promotion ends. Only choose an offer that has a respectable rate afterward. This way, if you can’t find another transfer option, you’re not putting yourself in a horrendous financial position. For instance, if I had credit card debt to move, I would never take Discover’s offer based solely on the rate they’re giving me afterward. Make a plan and stick to it.
Do an after action review—how are you changing your behaviors?
I alluded to this above, but the deeper root issue here is that you need to adjust your money mindset. That way you don’t get into the situation where you’ll need to do a balance transfer again. For those of you that have read my articles over the past few years, you’ve probably figured out by now that I’m very much against credit card debt. The rates are too high, and it creates spending behaviors that aren’t sustainable long-term.
If you’ve found yourself in a position where you have so much debt that you need to do a balance transfer (rather than merely being strategic about your payoff plan) make your primary focus paying off debt and nothing else. I would recommend something like the Snowball Method, which Dave Ramsey advocates.
Doing a balance transfer can be a very smart financial move—but only if you’re doing it for the right reasons.
If you have tons of debt and you’re looking to add to it by moving money from one card to the other (yes, people do this) then focus instead on paying your balances down the traditional way. There’s a certain mindset you need to have if you’re going to use balance transfers effectively because it will feel like you’ve paid your debt off when all you’ve done is move it somewhere else.
If you follow the steps above and analyze your debt, your offers, and create a paydown plan, taking advantage of a balance transfer is a smart financial decision, and it can help you get out of debt quicker.