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- Balance transfer credit cards can get you out of high-interest debt quickly and efficiently.
- Many pitfalls can end balance transfer deals early, costing you money and potentially hurting your credit.
- As long as you follow the rules of smart balance transfer behavior, these products can work to your advantage.
Balance transfer credit cards with 0 percent intro APR periods are among the most powerful tools available to consumers saddled with high-interest debt. With these cards, you can shift debt that is costing you a small fortune in fees to a new account that won’t charge you any interest on those balances for a fixed number of months. The savings can be tremendous, but you will want to approach the process in just the right way. Errors can cause the benefits to either erode or disappear entirely.
Here are eight balance transfer credit card mistakes that you definitely want to avoid making.
1. Applying without checking if you qualify
Every time you submit a credit card application, the lender will notify the credit bureaus and add a hard inquiry to your credit file. Such inquiries will remain on your file for two years and will be calculated into your credit score.
For FICO scores, hard inquiries fall under the “new credit” category, which comprises 10 percent of a credit score. If you don’t have much on your credit report or your scores are already on the lower end of the scale, an abundance of hard inquiries can have a particularly strong, negative impact.
For this reason, it is very important to check to see if you will qualify for a particular balance transfer card before submitting the application. Most require credit scores that are at least in the “good” scoring range. You can also see if you are prequalified for a card, a process that won’t trigger a hard inquiry. Prequalification doesn’t guarantee acceptance but can guide you to the card you most likely qualify for and that matches your needs.
2. Assuming you can transfer over all of your debt to one card
When transferring debt to a new balance transfer card, keep in mind that you may not receive a high enough credit limit to wipe it out completely.
Your credit limit depends on your credit score and other factors like your income, and you may be approved for a credit limit on your new balance transfer card that’s lower than the amount you need to transfer. For example, say you have $10,000 worth of debt on a few credit cards, but you’re granted a credit limit of $5,000 on your new balance transfer card. That means you can likely only transfer over half of your debt.
And in some cases, issuers limit the amount you can transfer to 75 percent of your total credit limit.
3. Making a late payment on the new card
When agreeing to a balance transfer card, you are also consenting to the issuer’s expectations. One is that you make your payments on time.
If you are late, chances are the 0 percent intro APR arrangement will end prematurely.
To sour the problem even further, the issuer may also impose a punitive interest rate for a few months, which is even higher than the regular rate. Read the terms and conditions of the card to know what that rate will be and how it will be applied.
4. Running up the debt on the old card
After you transfer your debt to the new card, the original card will have an open credit limit, meaning you can make charges. While doing so can be positive — especially if you will be earning rewards when you make those purchases — you’ll want to take pains to pay the bill in full every month. If you don’t, the debt can creep up, interest will be added and you may find yourself in a worse financial position than when you started.
Not only will you have a balance on the new credit card, but also on the first. That can add stress to your budget as you try to make the payments. Additionally, the escalating debt can hurt your credit utilization ratio, causing your credit score and options for resolution to decline.
5. Not having a payoff plan
Balance transfer cards can help you get out of debt quickly and cheaply. To do that, you will need to have a payoff plan. Review your budget to determine exactly how much you can dedicate to the debt payments on a monthly basis. Then grab a calculator to know how long it will take you.
You will ideally arrange the payments so you are out of debt before the standard APR is imposed. For example, imagine you have a $5,800 balance on a new card that gives you a 0 percent intro APR for 15 months. To zero the debt out in that time frame, you will need to pay a minimum of $387. Have that sum automatically sent to the credit card issuer.
If you don’t have a payoff plan, though, you may make unnecessarily small payments and end up with a remaining balance after the zero-interest period has expired, and the debt will accumulate interest.
6. Neglecting the fee in your analysis
Almost all balance transfer credit cards involve an initial balance transfer fee. The credit card issuer that inherited your debt from another account will usually charge between 3 percent and 5 percent of the balance. Therefore it can cost up to $400 to transfer an $8,000 balance.
The fee is usually worthwhile, but make sure it makes sense first, as it’ll add to your overall debt balance. If you can make large payments and get out of debt on your own in a few months, a balance transfer credit card may not be the best idea.
7. Using the card while you’re paying off the transferred balance
For balance transfer credit cards, the 0 percent intro APR applies to the debt you move over. In many cases, you’ll be charged the standard APR for purchases (unless the card offers an introductory APR on purchases as well) and the cash withdrawal rate if you take out money. So if you assume you can enjoy the zero-interest period on everything, think again.
As long as you have enough of an open credit line, you can make purchases with your balance transfer card — but beware. Using the new card while you are in repayment mode can complicate the process. With a carefully-developed payoff plan, you will know the date by which your debt will be paid off. However, if you make more charges, you’ll have to compute payments for those transactions too.
A better plan is to use a different card for transactions until the debt on the balance transfer card is paid off. If you want to make partial payments, find out what the APR is on all your cards and use the one with the lowest rate. Odds are you don’t know the rate off-hand. A 2023 Bankrate survey found that 50 percent of Gen Zers with credit card debt don’t know the rates attached to their credit cards, followed by 46 percent of millennials, 43 percent of Gen Xers and 39 percent of baby boomers.
8. Adding loan debt without thinking it through
Personal loans can have very high interest rates, so you may be tempted to move what you owe to a balance transfer credit card. Unlike credit cards, however, installment loans are not included in your credit utilization ratio. So converting loans into revolving balances can result in a lower credit score.
The amount you have to pay to get out of debt each month may rise dramatically too.
For instance, payments for a $10,000 loan with a five-year term and an interest rate of 6 percent will be about $194. Assuming you pay it down to $9,000 and squish that loan — now including an estimated $360 fee — into a balance transfer card with a 0 percent intro APR for 15 months, the payments would rise to $624 in order to get out of debt with no extra fees.
If you can handle the higher payment, the arrangement may be beneficial. But if you can’t, you may put yourself in a tight spot.
The bottom line
Balance transfer credit cards can give you up to 21 months to manage debt without worrying about added interest increasing the liability. You just have to treat these products carefully.
With a little attention and know-how, though, you can avoid common mistakes and come out ahead.