Editorial Policy

How to maximize a balance transfer offer

Eva Norlyk Smith Ph.D

September 9, 2011

Long-term 0 percent balance transfer offers can be a great way to get a cheap short-term loan. However, they can also cost you a great deal more than you save if you’re not careful.

Here’s how to avoid the traps and make the most of your next balance transfer deal.

Step No. 1: Consider the bigger picture.
Before taking out a balance transfer, consider the long-term financial implications. Balance transfers can be very helpful if you’re planning to make a large purchase, renovate a home or if you just need a short-term loan. However, they are not such a great idea if you’re simply looking for a cash infusion to make ends meet.

“Credit cards with balance transfers usually come with higher interest rates,” says Michael Rubin, author of “Beyond Paycheck to Paycheck: A Conversation About Income, Wealth, and the Steps in Between.” “If you have a significant balance when the 0 APR offer expires, you can easily end up paying more than you save.”

In addition, taking out a large balance transfer or applying for new credit can lower your FICO score. If you’re planning to take out a mortgage or other large loan in the future, you might want to defer balance transfers until later.

Step No. 2: Determine which deals you qualify for.
To get approved for the best balance transfer offers, you must have excellent credit. For example, if the advertised length of the promotional period is up to 15 months, you may still be offered a shorter interest-free period — sometimes as little as six months — if you have less than excellent credit.

If you don’t know what your credit score is, use a FICO score calculator to estimate your credit score or pay to get a copy at myFICO.com. If your credit score is below 720, you are unlikely to be eligible for the best balance transfer deals.

The fine details of the offer will be buried in the footnotes, so be sure to thoroughly read those details before you apply.

Step No. 3: Do the math.
Calculate the cost of the balance transfer before you pick an offer. Most credit cards charge a 3 to 5 percent transaction fee for balance transfers so be sure to factor this in.

A 0 percent APR balance transfer offer lasting 21 months may be worth the transaction fee because it will average out to a very low-cost loan. However, if the interest-free promotional period is only six months, the effective annual interest rate for a transfer with, say, a 5 percent balance transfer fee is 10 percent—a much less attractive offer.

Step No. 4: Check your budget.
The secret to making a balance transfer work for you is to pay off the balance in full by the end of the promotional period. But first, you’ll need to check ahead of time whether you can afford it.

“You don’t want to be in a game where you’re constantly opening and closing credit cards to carry the balance transfer forward,” says Rubin. “The aim is to pay the thing off. If you’re just moving the balance from one card to another, it’s a good indicator that you’re not attacking the main problem, which is the debt.”

To determine how large a balance transfer you can take out, calculate how much you can afford to pay the balance down by each month. (If you don’t already have a budget that breaks down your income and expenses, you will need to create one.)

Then, multiply the amount you can pay off each month by the length of the promotional period. For example, if you have a card with a 15-month promotional balance transfer period and you can afford to pay the balance down by $200 each month, you can ideally take out a balance transfer of $3,000, minus the amount of the balance transfer fee, and avoid paying any interest.

Step No. 5: Make it automatic.
Set up automatic monthly payments from your bank account in the amount you will be paying the balance down by each month. This way, you won’t have to worry about late or missed payments, and the balance will automatically be paid off in full at the end of the promotional period.

Step No. 6: Watch out for penalty fee traps.
For most balance transfer cards, small slip-ups like a late payment or a returned check will trigger penalty APRs up to 29.99 percent.

The good news is that the Credit CARD Act of 2009 prevents card issuers from applying those penalty rates to existing balances (such as your 0 percent APR promotional balance). The bad news is that card issuers can apply the penalty rate to future charges, such as new purchases or another balance transfer.

Worse, while some cards will reset the penalty APR to a lower rate if you pay the card on time for six billing cycles, other card issuers continue to charge the penalty APR indefinitely.

Read the terms of the offer carefully to determine what would trigger the penalty rate, and what the consequences are. If the terms aren’t clear, call a customer service representative to clarify.

Step No. 7: Leave the card in a drawer.
Yes, it is tempting to take advantage of the 0 percent APR on purchases, which many balance transfer cards offer as well. However, more likely than not, it will leave you holding the short end of the stick, paying high interest charges on debt you couldn’t afford to pay back at the end of the promotional period.

To avoid overcharging, never mix and match balance transfers and new purchases on a card. Once you make a 0 percent balance transfer, put the card away in a drawer until the balance transfer is paid off.

(Updated 09-09-2011. Originally published 05-22-2009.)