A balance transfer credit card can help you save thousands of dollars. With the right offer, you can move your debt from one card to another and pay as low as 0% interest for a specified amount of time. This is especially helpful while so many people are struggling financially: Fully 51% of Americans with credit card debt took on more because of the pandemic.
Unfortunately, even as the cards are increasingly useful, they're harder to get. And they come with certain drawbacks you need to watch out for, like fees or high interest rates you could be stuck with later.
Here's what you need to know.
Over the past year, balance transfer cards have gotten more difficult to come by, says Ted Rossman, industry analyst at CreditCards.com: "The pandemic has definitely made lenders more risk averse, particularly for this kind of audience."
Card issuers sent 42% fewer direct mail advertisements for 0% balance transfer cards in the first three quarters of 2020, compared to the same period the year before, says Rossman, citing a Mintel survey. "I would say the typical credit score they're looking for these days is probably 720 or above," he says. "A year before it was likely more like 670." In 2020, the average FICO score in the U.S. was 710.
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And while the credit score lenders are seeking has gone up over the last year, the available credit limit has gone down. "If you owe that average $5,300 and change, you may not be able to move the whole balance over," Rossman says. "Right now the average credit limit for people getting approved is more like half of that."
When seeking an offer, don't apply for several cards at the same time, though: "That's going to run up a bunch of inquiries on your credit report and drag down your score and make you look risky," he says. "That is kind of an unfortunate part of the application process."
Many balance transfer credit cards offer introductory periods where you could pay as little as 0% interest for a set amount of time. The minimized interest period typically runs from 12 to 20 months. "The minimum payment math is staggering," says Rossman. "It can be a really tremendous savings, because the average credit card charges 16%."
As of January 2021, the average credit card debt for Americans was $5,315. If you are carrying that balance on a card with 16% interest, and you put $100 toward the balance each month, it could take you almost eight years to eliminate the balance, and you'll pay roughly $4,000 in interest.
If you have a 0% credit card, you can put the money you wouldn't spend on interest in your emergency fund instead or invest it.
A 0% balance transfer card can often include the chance to pay 0% interest on your purchases during that 12 to 20 month period. But if you're trying to be more mindful with your spending, that is also something to watch out for.
"Many of the balance transfer cards also come with the zero APR for purchases, so a lot of people find themselves in more debt than in the beginning, because you're continuing to purchase new items," says Kim Hardy, CPA/CFF, member of the American Institute of CPAs' Financial Literacy Commission.
When you look through the fine print, determine if the card has an annual fee or if there is a balance transfer fee. A typical balance transfer fee runs about 3% to 5% of the amount of credit card debt that is being moved onto the card.
"Find out the interest rate, and find out how long you have that interest rate, and look at the balance transfer fee," says Hardy. "And do the math on your current interest rate, and compare that to the balance transfer fee to see what you're really saving."
Once you're approved, you'll find out what your interest rate will be after the introductory period. It could be higher than the rate you're paying on your current card, which might affect whether you want to get it. Also make note of when the regular interest rate starts, since this might affect which card you use and how you spend.
One straightforward way to improve your credit score is to lower your credit utilization ratio, says Rossman, or look into alternative scoring systems like Experian Boost, which can raise your credit score by about 12 points.
"You can sign up for a free program, no risk, you give them some information, and they can look for on-time cellphone, utility, and Netflix payments," he says. "And if that plays out in your favor, that could be enough to tip the balance or at least move you into a more creditworthy tier. So that would be a good thing to consider."
However, the system only works if a lender is checking Experian, not if they're using another credit bureau like Equifax or TransUnion. You can take some of the guesswork out of the equation by calling customer service to find out which credit bureau the lender will check, Rossman says.
Whenever you're taking on or transferring debt, it's smart to have a plan for paying it off. "Balance transfer cards are great opportunities, but if it's for a year or 15 months you should try to have a goal to pay off that debt within that time," Hardy says. "If you can't pay it off within that time, definitely make sure that the interest rate after that introductory period is still saving you money compared to your current interest rate."
She adds, "The biggest thing is having a plan and making sure you can pay off the debt within a certain amount of time so that the balance transfer is actually beneficial."
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