“Balance transfers allow you to take the balances on your existing cards and transfer them to another credit card, usually at a lower rate,” says Matt Freeman, head of credit card products at Navy Federal Credit Union.
“This new lower rate helps to reduce your level of debt because more of your monthly payment will go toward paying off debt, rather than paying interest.”
1. Are you treating the symptom or the core problem?
Credit card debt is no joke. And if you’re neck-deep in it, transferring some of your debt to a new card with a 0% APR promotion can give you some relief.
But if you’re doing so without any plans to pay off the debt entirely, you’re only addressing the symptom of your debt problem — and you may be making that problem worse.
If you’re considering doing a balance transfer, first make a plan to get rid of your debt. Preferably, your plan will include paying off the balance on the new card before the introductory promotion ends. If necessary, stop using your credit cards altogether to avoid adding more debt into the mix.
2. Which debts are you considering transferring?
But just because you can doesn’t mean you should. If you have a large balance on a low-interest loan, moving it to a credit card that has a high interest rate once the 0% APR promotion is over puts your finances at risk.
Of course, you could have plans to pay off the balance before the promotion ends. But if something unexpected happens and you have to put off your repayment plan, you could end up stuck with high-interest debt that you never intended to have.
3. Have you done the math?
If you’re paying a high interest rate on your credit card debt, moving it to a card with a 0% APR promotion sounds like a no-brainer. But depending on how much debt you have and how soon you’re planning to pay it off, it might be cheaper to keep it where it is.
For example, say you have a $1,000 balance on a card with a 17% APR. If you have plans to pay off the balance in three months, you’ll pay $28.47 in interest over that time. If, however, you transfer the balance to a card with a 0% APR promotion and a 3% balance transfer fee, you’ll pay $30 upfront to move the balance.
The math can get even trickier if you have multiple credit cards with balances and have a longer repayment plan. Be sure to use a balance transfer calculator to know exactly what the costs will be.
4. How will it affect your credit?
There are several factors that go into calculating your credit score and doing a balance transfer can affect most of them.
A full 30% of your credit score is based on how much you owe, and your credit utilization is part of that. Your utilization is calculated by dividing your balance by your credit limit. Experts recommend keeping the number below 30%, but it’s best to keep it as low as possible.
So if you transfer a $4,000 balance from a card with a $16,000 limit (25% utilization) to a card with a limit of $8,000 (50% utilization), your credit score could drop.
Length of credit history
Making up 15% of your total credit score, your length of credit history could go down if you apply for a new credit card to do the transfer. That’s because this factor includes an average age of all of your credit accounts. So every time you apply for a new one, the average drops.
As a result, this could drop your credit score, although the impact won’t be nearly as big as with a spiked credit utilization.
Every time you apply for a credit account, a hard inquiry will show up on your credit report. Each inquiry can knock a few points off your credit score. And if you apply for multiple cards in a short period, it’ll hurt your score even more.
5. How will a balance transfer help you?
There are both advantages and drawbacks that come with doing a balance transfer. It’s important that you know both and act accordingly.
There’s no one-size-fits-all answer as to whether a balance transfer is right, but if you know the facts and can make an informed decision about how a balance transfer will help you, then you’ll know that you’re making the right choice.
It’s important that you be honest with yourself about this question. The goal should be to get rid of credit card debt once and for all, and any plan that doesn’t work toward that goal will do little to help you.
Once you know for sure how a balance transfer will help you, figure out which card you should choose to do it. There are both personal credit cards and business credit cards that offer balance transfer promotions.
“Keep an eye out for balance transfers with no fees, zero percent interest during the introductory period, and a low rate after the intro period expires,” says Freeman. “Make sure you select a card that will give you enough time to pay down your balance in full.”
Compare each option carefully to make sure you’re getting the right deal.
6. Compare your options
A debt consolidation loan provides the benefit of a fixed payment schedule with a set date to be debt free. If you have trouble committing to a repayment schedule, a debt consolidation loan may provide the added structure you need to successfully get out of debt. If you are a homeowner, a home equity loan can also be used for debt consolidation but will typically offer lower rates. In any case, make sure to look at your options carefully.
Ben Luthi is a personal finance writer and a credit cards expert who loves helping consumers and business owners make better financial decisions. His work has been featured in Time, MarketWatch, Yahoo! Finance, U.S. News & World Report, CNBC, Success Magazine, USA Today, The Huffington Post and many more.