Balance transfer credit cards are a way to eliminate or reduce interest charges on high-interest debt. When you transfer balances, you’ll move your balance from your existing account to the new credit card offering a promotional interest for a period of time. By eliminating or reducing your interest rate, more of your monthly payment will go towards paying off the balance instead of making the bank more money.
Examples of high-interest debt are:
- credit card debt
- personal loans
- auto loans
- student loans
- payday loans
Why you should use a balance transfer credit card
There are two main reasons to use a balance transfer credit card. The first is when you have high interest debt that you are trying to pay off. And the second is when you owe some money, but need more time to pay it off without having a lot of interest charged.
Eliminating high interest debt
If you have debt that you’re trying to pay off, but high interest rates are getting in the way, then a balance transfer credit card can help. For a small balance transfer fee, you’ll receive a promotional interest rate as low as 0% on any balances that you transfer.
With your new interest rate, more of the money you pay each month goes towards paying off the debt and getting you one step closer to being debt-free! Wouldn’t that feel awesome?
Need more time to pay off a loan
If a big expense happens, but you don’t have the money to pay for it right away, it could be a disaster for your finances. Charging it to your credit card could result in an interest rate of 20% or more. The best option is to give yourself extra time to pay the bill with a balance transfer credit card.
Here’s what I would do. First, charge the purchase to a credit card that provides rewards like cash back, airline miles, or hotel points. Then, perform a balance transfer to a credit card that gives you at least 12 months to pay it back with no interest. Finally, reduce your expenses, sell unused items around the house, and earn extra money with a side hustle so you can pay off the balance before the 0% interest promo period ends.
What to look for with a balance transfer credit card
When transferring a balance, you want to minimize fees and interest while getting at least a 12-month period with no interest.
The best balance transfer credit cards offer the following:
- Welcome bonus on new purchases
- No annual fee
- 0% interest for at least 12 months
- Balance transfer fee of 3% or less
Some of the best balance transfer credit cards have 0% interest promotional periods of up to 21 months. That’s almost two years of no interest while you tackle your debt!
A few of these credit cards also offer a 0% interest rate on your purchases. While this may help in certain situations, your goal is to get out of debt. Avoid making new purchases on your credit card that you can’t pay off in full each month.
What to watch out for with a balance transfer credit card
Before you apply for a balance transfer credit card, understand the rules of the account. Most balance transfer cards charge a fee when paying off your current debt. This is fine, but beware of banks that charge higher fees than normal.
Also, make sure that any charges that you may make are paid off first when you make payments. You don’t want all of your payments going towards the 0% interest balance, while other purchases are charged interest.
Here’s what you don’t want with a balance transfer credit card:
- Annual fees – these fees reduce the savings from the 0% interest rate.
- High balance transfer fees – you shouldn’t pay more than 4% of the balance transferred.
- Payments go towards promotion rates first – all of your payments should go towards any purchases that are being charged interest before they are applied to 0% promotional interest rates.
- Short promotional rates – your 0% promotional period for balance transfers should be at least 12 months. Some credit cards offer promos up to 18 to 21 months.
The best balance transfer credit cards
When choosing a card, the best balance transfer credit cards will have low fees and offer an introductory rate for at least one year.