Editorial Policy

5 Tips for a Smooth Balance Transfer

Eva Norlyk Smith Ph.D.

May 8, 2012

QHi Eva,

I have just over $3,000 in debt on my credit card, which has a $4,000 credit limit. I’m thinking of doing a balance transfer to a card that has 0 percent interest for a year. All my debt is from emergency car repairs and other bills when I didn’t have a job.

I have a job now, and it’s my plan to transfer the money over and wipe out the debt well before a year is up. What should I do with my old card? I know it would be bad to close it, but should I make purchases on it every once in a while? Also, since I’ve never done a balance transfer before, do you have any advice for me on what to watch out for? My FICO score is in the low 700s. –Liz


ADear Liz,

Well, good for you. Balance transfers can be a great way to consolidate high-interest credit card debt and save money on interest. And paradoxically, applying for another credit card may even help raise your credit score over time, because it will help lower your debt-to-credit ratio, also called your credit utilization.Ask Eva

Indeed, right now, your credit utilization is very high. With a $3,000 balance on your card with a $4,000 limit, your debt-to-credit ratio is at 75 percent. Most experts recommend keeping credit utilization at around 10 percent of the credit limit and no higher than 30 percent. So the high debt on your credit card is likely hurting your credit score big time.

To qualify for the best balance transfer offers, you have to have excellent credit — ideally, a FICO score above 740. With a credit score in the low 700s, you can still get approved for some cards with attractive 0 percent annual percentage rates (APRs). Yet card issuers may start you out with a fairly low credit limit — lower than what you might need to transfer that $3,000 balance.

That doesn’t mean you shouldn’t apply. Here are some tips to guide you:

1. Pull a copy of your FICO score. First of all, find out exactly where you stand. If your credit score is lower than 740, don’t apply for the balance transfer offers for excellent credit. Instead, look for balance transfer offers for people with good credit.

2. Compare balance transfer offers. Obviously, the best balance transfer offers are those with the longest promotional 0 percent APR period. However, there are other variables to look for. Most card issuers charge a 3 percent to 5 percent balance transfer fee, so look for a card with the lowest fee.

Also, from time to time, card issuers will waive the balance transfer fee as a limited-time promotion, so look out for these types of offers as well. Right now, for example, Chase is offering a no-fee balance transfer offer on its Slate credit card, as long as the transfer is made within 30 days. That would save you $90 on a $3,000 balance transfer.

3. It’s OK to apply for more than one card. If you only have one credit card right now, consider applying for two balance transfer cards. It will help your credit score in the long run to expand your credit card portfolio, and applying for more than one card will up your chances of getting a high enough limit (between a couple of cards) to transfer all your debt. Applying for several cards will ding your credit score a little more, but as long as you continue to make all payments on time and don’t accumulate more credit card debt, the effect will be short-lived.

4. Read up on the terms. Despite offering an interest-free promotional period, card issuers make lots of money on 0 percent APR balance transfer cards. Why? Because a lot of people don’t read the terms! Here are the terms to be most alert to:

  • Interest rates. Most balance transfer cards come with high APRs at the end of the promotional term, so that rate may well be higher than what you’re paying on your current credit card. If this is the case, plan to not keep balances on your new credit card after the 0 percent APR period expires.
  • Penalty rates. Read up on the terms for the penalty rates on the card. Many balance transfer cards carry punitive interest rates of as high as 29.99 percent. These penalty rates can be triggered by simple transgressions, like paying the bill late. In some cases, even just one late payment can trigger the penalty rate.

Penalty rates cannot be applied retroactively to your 0 percent APR balance. However, they can be assessed to future charges, effectively rendering the card unusable for future use. So know your penalty rate triggers, and stay clear of them.

5. Know how to get to zero. Once you get your card, calculate how much you need to pay each month to zero out the balance by the end of the promotional period. Pay that amount each month, and preferably more. Keep the balance transfer credit card in a drawer, and don’t use it until the balance is paid off.

If you use the card for new purchases, it’s easier to lose track of how much you need to pay each month to zero out the balance before the promotional term expires. This is one of the reasons why people end up paying high interest rates on balances at the end of the promotional period, which often undermines savings considerably.

Instead, continue to use your old credit card for purchases, so you keep that card active as well. Just be sure to pay off the balance in full each month, so you don’t accumulate more credit card debt. Managing more than one credit card definitely takes a bit of juggling, but since it also helps improve your credit score, it can be well worth it.

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