Glossary Terms

Annual Fee
A credit card issuer may charge you a fee each year for your account. <a href='/glossary/what-is-annual-fee' title='See the full definition of Annual Fee'>read more</a>
Annual Percentage Rate
The cost of credit, including the interest and fees, expressed as an interest rate. APR was created to make it easier for consumers to compare loans... <a href='/glossary/what-is-annual-percentage-rate' title='See the full definition of Annual Percentage Rate'>read more</a>
Consolidating Debt
Replacing several debts or loans by transferring the balances to a single loan or line of credit, usually at a better rate. (Debt consolidation loans... <a href='/glossary/what-is-consolidating-debt' title='See the full definition of Consolidating Debt'>read more</a>
Initial Interest Rate
The interest rate that applies on the first day of a loan’s term. It may also be called a start rate, an introductory rate, a promotional rate, or a... <a href='/glossary/what-is-initial-interest-rate' title='See the full definition of Initial Interest Rate'>read more</a>
What is Debt?
Money that is owed to an individual or institution. Credit card balances, mortgages, auto loans and personal loans are all examples of debt. <a href='/glossary/what-is-debt' title='See the full definition of What is Debt?'>read more</a>

How helpful is a balance transfer credit card? Potentially, very. They can be powerful tools within a carefully constructed and highly disciplined debt-reduction strategy. They can save serious sums for those who carry balances at higher interest rates. Balance transfer cards also come with dangers, however, and must be treated seriously.

Benefits of Balance Transfer Credit Cards

Today, the average consumer pays an annual percentage rate (APR) of 15.56 percent for borrowing with a non-rewards credit card and 17.87 percent for rewards plastic. That means someone with balances of $10,000 on rewards cards (and plenty of Americans owe way more) could easily be paying $1,630 in interest in a year -- assuming she pays down her total by three percent each month and doesn't add any more debt.

Credit card balance transfer offers, which typically provide a zero-percent APR for up to 18 months, could save her lots of money -- as long as she dedicates every cent in interest saved (and more if possible) toward reducing her balance. Ideally, the amount transferred should be fully repaid by the time the introductory offer expires, and the "go-to" rate (the one normally charged) kicks in. That's a particularly important goal if the go-to rate for the new card is higher than that for the one from which the balance was originally transferred, a not uncommon situation.

Balance Transfers and Credit Scores

Many financial experts make a big fuss about the possible damage to credit scores from balance transfer products. And yet FICO, the company whose scoring systems are used in 90 percent of lending decisions, confirms that applying for -- and being approved for -- these cards in themselves makes no greater impact than opening any other new account. A temporary drop in score might be caused by the card issuer's credit check and the decrease in the average age of the borrower's accounts.

What does need managing is a cardholder's "credit utilization ratio." That's the relationship between a consumer's credit limits and his account balances. This is calculated both on a card-by-card basis and when all limits and card balances are lumped together. Ideally, no card should have a balance higher than 30 percent of its credit limit, and all balances together should be below 30 percent of all limits together. It's worth doing some math to make sure transferring balances doesn't breach those rules.

Balance Transfer Dangers

By far the biggest danger of a balance transfer credit card (and other forms of debt consolidation) is the illusion of being better off that this "free" borrowing can give consumers. Experts say that 75 to 80 percent of debtors attempting debt consolidation fail because they run their credit cards back up after zeroing the balances with a new loan. In addition, a 2013 UK study found that one third of borrowers failed to pay off their balances during the interest-free period -- that's how credit card companies make money with these things.
Another potential danger affects consumers who pay late. A single payment made just one day late is likely to cancel the balance transfer deal, and other penalties may be imposed. That UK study found as many as 20 percent of those with these products breached their agreements and faced penalties during their interest-free periods.

Be Smart

Those considering applying for balance transfer accounts should be aware of other factors, including:

  1. Many card issuers apply monthly payments to transferred balances rather than new purchases. That can mean more high-rate debt on the account. Don't charge new purchases to these cards.
  2. Except for occasional offers, almost every balance transfer credit card charges an initial fee, often three percent of the amount moved. This doesn't significantly reduce the attractiveness of such deals, but it's something to be considered.
  3. Repeatedly applying for a new balance transfer deal after each old one expires is unlikely to work as a long-term strategy. Card issuers aren't dumb, and they read credit reports as well as view credit scores.
  4. As always with plastic, the best deals tend to be reserved for those with good or excellent credit. However, balance transfer deals are often available for those in the fair credit category, which includes FICO scores in the 550-639 range.

None of these dangers should be enough to put off consumers who are determined to pay down their debts -- and who have the self-discipline to follow through. For them, balance transfer deals can be powerful tools -- there's no denying these cards' interest-free introductory periods can save people thousands. Like all financial products, however, balance transfer deals must be viewed strategically and taken seriously.

 

Frequently Asked Questions