Balance Transfer: Is It Right for You? | Millennial Money

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If you’ve found yourself with a lingering balance of high-interest debt that’s starting to haunt you in your sleep, you might be the perfect candidate for a balance transfer.

Chances are you’ve seen advertisements for 0% APR credit cards with up to 15 or 18 months of no interest for balance transfers. And, since you’re reading this article, we’ll assume your interests have been piqued.

First of all – congratulations. You are thinking critically in all the right ways. By considering a balance transfer, you’re well on your way to finding a strategy for paying off your high-interest debt more quickly.

How Much Will I Save With A Balance Transfer?

But maybe you’re not so confident, and you’re asking yourself, “are balance transfers worth it?”

It’s understandable. Life has a way of humbling even the savviest money enthusiast, so we’re here to help you get your confidence back.

The right balance transfer card will do just that – get you back on your feet and even save you money in unnecessary interest.

But before you can expect smooth sailing, there are a few questions you’ll likely want to ask before you navigate the pros and cons of balance transfers.

Though a balance transfer credit card can be an essential lifeline in helping you pay off modest credit card debt, it’s not a be-all-end-all solution.

Fear not – we’re here to address your FAQs and more with our helpful guide on how to pull off a balance transfer so that you can pay off your debt faster, and make it worth your time and effort!

Is it a Good Idea to do a Balance Transfer on a Credit Card?

We know what you might be thinking: Why get a new credit card to get out of credit card debt?

While this well-intentioned question is coming from the right place, it’s critical to do the math before assuming whether it is good or bad to transfer your credit card balances.

Before you’re ready to do your balance transfer, you’ll need to know your current interest rate, your total balance, and how much you would pay in interest over a year with your current credit card.

For instance, let’s imagine you have $1,200 worth of debt on a high-interest credit card with a 29% APR.

In one year, $1,200 x .29 = $348 in interest alone!

If your interest is $348 over 12 months, that’s a $29 fee every month that will never be applied to actually paying off your debt.

Let’s imagine you could only afford to make the minimum payment of $30 towards your credit card balance. That means every month you’d pay $30 towards your balance + $29 in fees, totaling $59. At this rate, paying $59 per month but having half of that cash swallowed up in credit card interest means it could take years to pay off a $1,200 balance.

But in an alternative scenario – a 0% APR balance transfer credit card – that $29 of interest you pay every month would go directly towards paying the actual balance. Not only will you pay off your credit card faster, but you’ll pay less in interest in the time it takes to pay off your debt.

If you had a 0% interest credit card that offered you 21 months to pay off your balance of $1,200, the entire monthly payment of $59 would be applied to your balance.

$59 x 21 months = $1,239.

There will be a balance transfer fee to consider, but it is usually no more than 3% of the total balance, much less than the average APR.

Try this example with your own numbers using our balance transfer calculator. 

Do Balance Transfers Affect Your Credit Score?

This is perhaps the most common question people have about balance transfers. The short answer is both yes and no, and the real answer is that it all depends.

While there is no penalty for executing a clean balance transfer and paying off your debt interest-free, opening a new credit card might result in a temporary hit due to a new hard credit inquiry. It will also decrease the average length of your accounts.

So initially, there may be an adverse impact on your credit score, but this will happen anytime you open a new credit line.

Longer term, however, doing a balance transfer may actually be good for your score.

Aside from the negative hit of opening a new card, a new line of credit means increasing your total credit limit, which may be a positive for your score as long as you don’t max it out. If you’re not disciplined, this could create an opportunity for spending beyond your means and thus increasing your credit utilization ratio and further lowering your score.

On the other hand, if you keep your former credit card on hand for emergencies only and remain disciplined enough to let the balance sit unused, this could actually increase your credit score because of your lowered credit utilization ratio. While closing the old credit card may be the safest way to avoid overspending, this can actually be detrimental to your credit score.

Ultimately, paying down your balance will raise your credit score incrementally over time. If you can do that faster with a balance transfer credit card, the net effect on your credit score should be positive.

When Might a Balance Transfer Card Make my Debt Worse?

Before we sing too many praises of balance transfer credit cards, it’s important to distinguish when a balance transfer might actually dig you into a deeper financial hole.

Though balance transfer cards can be an essential tool for paying off debt faster, if you are on the debt merry-go-round, it’s worth taking a minute to pause before applying for a new balance transfer credit card.

Too often, people jump from balance transfer card to balance transfer card, accumulating more revolving debt that they never pay off because they haven’t saved for unexpected expenses, and they are still stuck on living beyond their means.

If you are in this boat, a balance transfer card will not be your lifeline. Before you apply for a new credit card, take a moment, and pause. Interrupt your spending habits, stash a few months of savings to the side, and when you are in a place of better stability, then apply for your balance transfer credit card as a way to move from stability towards debt freedom.

When Should I Transfer my Credit Card Balance?

Transferring your credit card balance from one card to another is smart if you are in a place of financial stability.

What does stability mean exactly? You have a stable source of income, a good credit score, and a cash reserve to absorb unexpected expenses.

Most of all, your credit card balances are modest, meaning they aren’t maxed out. Making sure that these indicators of financial stability are in place first before transferring your credit card balance will help you make sure you have the discipline necessary to execute this debt payoff strategy successfully.

What are the Best Credit Cards to Transfer a Balance?

After you’ve done the math, assessed your financial stability, and decided that a balance transfer is worth it for you, here are our recommendations for the best balance transfer credit cards on the market:

• HSBC Gold Mastercard®
• Chase Freedom
• Chase Freedom Unlimited
• Capital One® Quicksilver® Cash Rewards
• U.S. Bank Cash+™ Visa Signature®
• Wells Fargo Cash Wise Visa®
• Capital One® SavorOne® Cash Rewards
• HSBC Cash Rewards Mastercard®
• Wells Fargo Propel American Express®

Additional Disclosures: Millennial Money has partnered with CardRatings and creditcards.com for our coverage of credit card products. Millennial Money, CardRatings and creditcards.com may receive a commission from card issuers. This site does not include all financial companies or financial offers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities.