In an ideal world, no one would ever carry a balance on their credit card. The best-case financial scenario would be paying your statement balance in full every month so that you didn’t risk accruing interest on your card.
According to a 2019 survey by CNBC Make It and Morning Consult, about 45% of adults who have credit cards don’t have corresponding credit card debt, meaning that they use these cards for convenience’s sake and pay the balance off every month. However, sometimes life gets in the way of that and credit card debt begins to accumulate.
In fact, according to the Federal Reserve Bank of New York, credit card balances went up by a total of $26 billion from the end of 2017 until the end of 2018. With an outstanding total debt of $870 billion, this is the first time that balances on credit cards “re-touched the 2008 peak,” the year when the housing bubble burst, triggering a recession.
The problem is, when debt accumulates on a high-interest card, the interest payments quickly add up, which makes it harder to pay off the total debt—which, in turn, can turn into a credit card debt spiral.
If you end up with mounting debt on a high-interest credit card, then a balance transfer credit card is one possible way to get out from under the interest payments, a strategy that comes with both pros and cons.
A balance transfer credit card allows you to transfer your existing credit card debt to a temporarily lower-interest or no-interest credit card. This can be the perfect opportunity to start paying down your debt with reduced interest rates and get out of the red zone. But you have to be sure you pay attention to the fine print.
What Is a Balance Transfer Credit Card?
The basics of balance transfer credit cards are fairly straightforward: open a new lower-interest or no-interest credit card, transfer your balance from a high-interest card to the new card, and hopefully pay off the debt faster with better terms
Paying off the debt may be easier without the high annual percentage rate (APR), because you end up saving a lot of money by not paying interest.
A balance transfer credit card, practically speaking, is also the only way to pay off one credit card with another, since most credit cards won’t let you use a different credit card to make your monthly payments.
Why Would You Use a Balance Transfer Credit Card?
Generally, you need a solid credit history to qualify for a balance transfer credit card. If you qualify, you can use the balance transfer credit card to pay down your existing debt without incurring more interest charges.
A balance transfer credit card typically gives you a period of time where you can pay off your debt without a high APR. However, introductory 0% APRs don’t last forever, but they must last at least six months, and can last up to 21 months (although this is rare—you’ll typically see six months or 12 months). So it’s a good idea, as long as you can, to pay off your debt before the introductory rate goes away.
Ideally, a balance transfer credit card would consolidate your debt so you’re paying off one card instead of multiple. If you’d rather avoid adding another credit card to your arsenal, another option is to use a lower-interest personal loan to consolidate your credit card debt.
Using a Balance Transfer Credit Card
There are a number of different balance transfer credit cards out there. They vary in terms of no-interest introductory periods, credit limits, rewards, transfer fees, and APR rates after the introductory period. You’ll want to shop around to see which card makes sense for you.
Once you pick a balance transfer credit card, you can typically transfer your balance from store credit cards, gas cards, or any other credit cards onto the new card. You obviously cannot transfer more debt than your new card’s credit limit.
That means if you have more debt than the limit you’re being offered on the new card, you could end up with at least two credit card bills to pay off. You probably won’t know the credit limit you’ll receive until after you’re approved, unfortunately, which can make it more challenging for planning purposes.
Even when you request a certain amount, it’s the card issuer who makes the final credit limit determination.
After you’re approved, the credit card company will contact your existing debt holders and transfer the balances. This typically takes one to two weeks (but could even take as long as three); if you have any payments due in that period, you should make them so as not to incur missed payment penalties.
Once you transfer your debt, your old card will have a zero balance, but it still will not be closed unless you choose to close it. (There can be credit consequences for closing accounts, so be sure to do your research.)
What are the pros and cons of a balance transfer credit card?
Sometimes, transferring your outstanding credit card balances to a no-interest or low-interest card makes good sense. For example, let’s say that you know you’re getting a bonus or tax refund soon, so you feel confident that you can pay off that debt within the introductory period on a balance transfer credit card.
Or, maybe you know that you need to put a larger purchase or repair on a credit card, but you’ve included those payments into your budget in a way that should ensure you can pay off that debt within the no-interest period on your balance transfer card. Again, depending upon the card terms, and your personal goals, this move could prove to be logical and budget savvy
Having said that, plans don’t always work out as anticipated. Bonuses and refund checks can get delayed, and unexpected expenses can throw off your budget.
If that happens, and you don’t pay off your outstanding balance on the balance transfer card within the introductory period, the credit card will shift to its regular interest rate and APR, which could be even higher than the credit card you transferred from in the first place.
To make matters worse, if you end up paying interest on the entire amount that you transferred, this may end up being a more expensive deal—even if the interest rate on your original credit card(s) is the same as on the balance transfer card. That’s because you might also have needed to pay a balance transfer fee.
In fact, most balance transfer credit cards charge a balance transfer fee, typically around 3%—and sometimes as high as 5%. This can add up if you’re transferring a large amount of debt.
Be sure to do the math on how much you’d be saving in interest payments compared to how much the balance transfer fee will cost.
For example, with a transfer balance of $10,000, your fee could range between $300 and $500! Note that some balance transfer credit cards also offer an introductory period without transfer fees and with 0% APR, so shop around.
Here are a couple of more things you may want to consider. If you’re thinking about choosing a no-interest credit card, read the fine print carefully because, sometimes, the zero percent clause only applies when you’re purchasing something new, not when transferring balances.
Plus, if you make a late payment, there may be another clause, one that instantly revokes the no-interest rate, perhaps raising yours to a penalty APR that could be as high as nearly 30%.
A common concern is whether opening a new balance transfer credit card will hurt your credit score. If you pay off the debt on the new card, however, and don’t incur additional unpaid debt, you may be able to avoid hurting your credit score in the long run.
But if you end up with debt on the card after your introductory rate has ended, and then start accruing interest, it can put you back into credit card debt, which may hurt your score. Additionally, if you close your old credit cards, that too can have an impact on your credit score, so research carefully to determine what’s best for your situation.
Before signing up for a balance transfer credit card, things to verify include whether transferring your balance will save you money, whether it’s likely you can pay your debt off during the introductory period, and whether closing old credit card accounts could impact your credit score.
SoFi Personal Loans
As an alternative to transferring your credit card debt to a balance transfer card, you could consider consolidating your balances with an unsecured personal loan.
If you do so with a lender like SoFi, you may be able to get a lower interest rate than what you’re paying on your high-interest credit cards. To find out how much you may be able to save, you can use our personal loan calculator to get a rough estimate.
Plus, with a personal loan from SoFi, you don’t need to worry about introductory interest rate periods or balance transfer fees. If you qualify for and choose a fixed-rate personal loan, your interest rate won’t go up over the life of the loan, which can make it easier to budget in order to get out of challenging credit card debt cycles.
And there are no fees: No origination fees. No prepayment penalties, either, which could result in you paying your loan down faster—or even off, at any time.
At SoFi, the goal is to set you up to succeed. In fact, if you lose your job, SoFi offers a program that can temporarily pause personal loan payments for qualifying members. SoFi’s career services can even help you to find a job.
Looking for an alternative to another credit card? Consider a SoFi personal loan to consolidate and pay off credit card debt.
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