At 5 o’clock in the morning, you rouse yourself from bed, put on a t-shirt and old jeans, and head out to your garage. You pull all your unwanted collectables and last seasons’ clothing out of boxes and start laying them out on tables with price tags. An hour later – the local yard sale aficionados have descended upon your lawn to pilfer the things you don’t want and find some hidden treasures in your junk pile.
Balance transfers aren’t much different. In both cases, you’re trying to get rid of something you don’t want and someone else finds it valuable.
What is a balance transfer?
You may not like your credit card debt – in fact we hope you hate it – but banks love it. Why? Debt makes the banks a lot of money. Every year, banks make billions of dollars on credit cards, so banks are constantly looking to get more of your debt.
A balance transfer is a way for them to steal your debt from the competition.
Imagine you work at Citibank. You have a customer who has $5,000 of debt at Chase, and you want to convince that customer to move their debt from Chase to Citi. What do you do? You give her a great switching incentive (just like when your cable company offers you a great rate for the first 12 months of a contract). So, you tell the customer that she can pay 0% for the next 18 months. All that person needs to do is pay a one-time fee of 3%.
Almost all balance transfers have the following features:
A one-time fee: these fees are usually between 3% – 4%. They are charged up-front and added to the balance.
A promotional interest rate, usually 0%: these promotional rates can last from as few as 6 to as many as 48 months.
How do banks make money?
So, the customer moves her debt from Chase to Citi. Is the bank happy to be charging such a low interest rate? Of course not! Our Citibanker expects the customer to do one of the following:
Miss a few payments. Before the CARD Act, a single missed payment (even by 1 day) meant the bank could increase the interest rate from 0% to a punitive 30% or higher. That is no longer allowed. But, if you go 60 days past due, the bank can increase your rate.
Spend on the card. If you start spending on the card, then your balance won’t go down. Even better for the bank, interest will start accruing on the money you spend right away (unless you pay off the full balance, including the balance transfer)
Still have a balance at the end of the promotional offer. If you are given 0% for 18 months, banks are betting that you will still have a balance in month 19. And if you have been spending on your card, it could be a big balance. From month 19, the bank will start charging a nice high interest rate and your payment goes up.
Unfortunately, a lot of people fall into these traps. That is why banks keep offering balance transfers. But, if you are savvy, you can easily avoid all of these traps.
Set up an automatic debit as soon as you get the card and complete the balance transfer. You will never be late.
Once you get the card, put it in the freezer (hypothetically of course). Never spend on it!
Make sure you have a plan for the end of the balance transfer. If you have 0% for 18 months, then make sure you shop around for the next balance transfer in month 18 so that you don’t have to pay the high go-to interest rate.
But the bank charges a fee. Do I really save money?
So many people write about their fear of the balance transfer fee. Here is a general rule: if you can pay off your debt in 6 months or less, then the fee is not worth it. If it will take longer than 6 months, than it is almost definitely worth it. We will do the math for you on our Balance Transfer page. I think you will be shocked by how much you can save.
Let’s break it down: $10,000 of debt at a 20% interest rate. You decide to do an 18 month balance transfer with a 3% fee. So, you pay a $300 fee up-front. That fee may sound scary ($300 is a lot of money), but, during the next 18 months, you would have paid $2,758 of interest. You will be savings $2,458 over 18 months.
Just think about it. Rather than giving $2,458 to the bank, you can pay off your debt so much faster!
Feel up to the challenge? Let’s walk you through how to get a balance transfer!
Consider these balance transfer cards
- Annual fee
- Intro Purchase APR
- 0% for 6 months
- Intro BT APR
- 0% for 18 months
- Balance Transfer Fee
- 3% intro balance transfer fee, up to 5% fee on future balance transfers (see terms)*
- Regular APR
- 13.74% - 24.74% Variable
- Rewards Rate
- 5% cash back at different places each quarter like gas stations, grocery stores, restaurants, Amazon.com and more up to the quarterly maximum, each time you activate, 1% unlimited cash back on all other purchases - automatically.
Featured Accounts from our PartnersAD
Intro 0% for 18 months on Balance Transfers, then a 13.74% - 24.74% Variable APR.
0% intro on purchases for 15 months, after that a 15.74% - 25.74% (Variable) APR. Earn unlimited 1.5% Cash Back on every purchase, every day.
Earn a one-time $300 cash bonus after you spend $3000 on purchases within the first 3 months from account opening.