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How a balance transfer credit card can help you manage debt

How a balance transfer credit card can help you manage debt
(Image credit: Photo by on Unsplash)

If you have existing card debt to clear, a balance transfer credit card can be a smart way to pay it off more cheaply. Balance transfer credit cards are becoming increasingly popular with Americans, with a report by the Consumer Financial Protection Bureau (CFPB) highlighting that this type of activity has increased by 38% since 2015. So how do balance transfer cards work and how do you know if they are right for you? 

Balance transfer credit cards can be a useful tool for helping you to clear debt more effectively. This is because they allow you to move existing card balances across and pay a lower rate of interest on that debt for a fixed number of months. Some balance transfer credit cards even allow you to avoid paying interest completely for several billing cycles – up to 18 in the best cases.

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If your money problems are too big for credit cards, consider one of the best debt settlement companies (opens in new tab) instead, to clear your debt.

The main advantage of a balance transfer card is it can offer some breathing space and help you pay down your debt more quickly and cheaply. All your monthly payments will go towards paying off the balance, rather than paying off interest. Balance transfer credit cards can also help you to consolidate multiple debts into one manageable monthly payment, and is a far less drastic solution than approaching one of the best debt consolidation companies.

To carry out a transfer, you will need to know the account number for your existing balance and the amount you need to transfer. Balance transfers usually only take a few days, although in some cases they can take a few weeks. 

What to watch out for with credit cards

If you are thinking of applying for a balance transfer credit card, always read the fine print carefully and make sure you understand the terms and conditions fully. Balance transfer credit cards can be extremely effective – but only if used in the right way. Below, we have highlighted some of the details to watch out for: 

Balance transfer fees
There will usually be a transfer fee when you apply for a balance transfer credit card. Most cards will charge you around 2% to 5% of the amount you are transferring, and this will be added to your total balance. It’s important to factor this in before you apply for a card. In some cases, you may get a lower fee if you transfer your balance within a certain number of days.

Balance transfers within the same bank
You won’t usually be able to transfer a balance from one card to another within the same bank or issuer. This is simply because you are already their customer, so the bank won’t benefit from taking new business from you.

Switch to another card once the 0% rate expires

Switch to another card once the 0% rate expires. (Image credit: Getty Images)

Go-to rates
If you choose a balance transfer credit card that has an introductory 0% APR period, be aware that once that period ends, you’ll be charged interest at the card’s go-to rate. It is best to try and clear your debt before the introductory period ends, but if you can’t, ensure you know how much interest you will be charged. Note that it may be higher than the rate on the card you originally borrowed on.  

Missed payments
If you have an introductory 0% APR balance transfer card and you miss a payment, in most cases, even if you are only a day late, the rate will default to the regular varying APR and you will no longer benefit from the 0% APR offer. You will also usually have to pay a fee of around $28 to $39 each time you miss or are late with a payment. 

Minimum payments
Minimum payments on credit cards are typically set very low. You may, for instance, be asked to pay a fixed payment of around $20 each month or 1% to 3% of your balance. Only paying the minimum each month means it will take a long time to pay off your credit card debt in full – and you are certainly unlikely to pay it off before any 0% APR period you’ve taken advantage of comes to an end.

Restrictions for the top cards
To qualify for the top balance transfer credit cards, you will need good credit. If you know your credit has suffered, read our article: how to improve your credit score (opens in new tab) for some tips to get it back on track.

How to use a balance transfer card more effectively

Before applying for a balance transfer credit card, it is important to know exactly how much you want to transfer and what the credit limit is for balance transfers on your chosen card. Be aware it may not be high enough to meet your requirements so you may need to transfer a smaller balance over from your existing card, and get a personal loan online (opens in new tab) to cover the rest.

Once you have transferred your balance, avoid using your card for spending purposes. Not only could you pay a much higher rate of interest on your purchases, you will also build up more debt just as you are trying to pay it down. If you absolutely need to spend on a credit card, choose one designed for purchases – again, some purchase credit cards offer introductory 0% APR periods.

It pays to set-up automatic repayments, so you don't miss any

It pays to set-up automatic repayments, so you don't miss any. (Image credit: Getty Images)

It is also important to have a plan in place to pay off your credit card debt as quickly as you can. To help with this, it is a good idea to set up automatic repayments on your accounts to ensure you make your card repayments on time. Ideally set them so that you pay off more than the minimum each month. If you are taking advantage of an introductory 0% APR period, it’s worth working out how much you need to pay each month in order to have cleared your balance before the 0% APR offer ends. If you can’t afford to pay this amount, pay off as much as you can. You may then need to carry out another balance transfer once the introductory 0% APR deal ends. 

In some cases, you may be offered a balance transfer rate that will remain fixed for the life of the balance. Although you will still have to pay interest, rates can be competitive, and it can work out to be more cost-effective than carrying out several balance transfers and handing over fees each time. Transferring a balance frequently can also negatively impact your credit score. 

Finally, if you are rejected for a credit card, be wary of applying for another one immediately. Instead, try to space out applications by around six months. Read our article on how to increase your chances of getting accepted for credit (opens in new tab) to learn how to boost your chances of approval. If that doesn’t work, some of the best credit repair services (opens in new tab) will help you do it, for a fee.

Rachel is a finance expert and regular contributor to Top Ten Reviews. She has crafted expert financial advice for the likes of The Spectator, Money Supermarket, Money to the Masses, and The Observer. She has written extensively about money-saving tips, and about how you can make the most of your finances in relation to loans, house buying, and other subjects.