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Balance transfer competition is heating up

Elderly man is paying online by using smart phone and credit card
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Elderly man is paying online by using smart phone and credit card
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My top tip for getting out of credit card debt is to sign up for a 0 percent balance transfer card. These allow you to move your existing high-cost credit card debt over to a new card, with an interest-free promotional rate that lasts as long as 21 months.

To my pleasant surprise, these offers have gotten even more generous in recent months, despite the Federal Reserve’s series of interest rate hikes. In the past, when rates have gone up, balance transfer promotions have often gotten shorter and have assessed higher fees. That’s not the norm right now.

In fact, earlier this week, Bank of America extended the 0 percent balance transfer term on the BankAmericard® credit card from 18 to 21 months (as long as the transfers are completed within 60 days of opening the account). The balance transfer fee is still 3 percent (minimum $10). The variable APR after the promotion expires is between 14.24 and 24.24 percent, depending on the cardholder’s creditworthiness.

The BankAmericard is now tied with the Wells Fargo Reflect® Card, the Citi Simplicity® Card and the Citi Diamond Preferred® Card for the longest interest-free balance transfer period on the market. The Reflect card’s interest-free balance transfer term is technically 18 months, although it can be extended to up to 21 months provided that all payments are made on time. The Reflect card debuted last fall, and within the past year, Wells Fargo and Bank of America have joined Citi at the longest end of the balance transfer market. Wells Fargo Reflect Card’s intro APR offer details: 0% intro APR for 18 months from account opening on purchases and qualifying balance transfers. Intro APR extension of up to 3 months with on-time minimum payments during the intro and extension periods. 15.99% to 27.99% variable APR thereafter; balance transfers made within 120 days qualify for the intro rate and fee of 3% then a BT fee of up to 5%, min $5

Fees

The Reflect also has a 3 percent transfer fee (within the first 120 days of opening the account, then it increases to 5 percent, in both cases with a $5 minimum). The two Citi cards have 5 percent transfer fees ($5 minimum) and require these interest-free balance transfers to be completed within four months of opening the account.

After the promotional periods, the regular variable APRs are 15.99 to 27.99 percent on the Reflect card, 16.99 to 26.99 percent on the Simplicity and 15.99 to 25.99 percent on the Diamond Preferred.

Why do card issuers offer 0 percent balance transfers?

These promotions are best viewed as marketing tools that bring in new customers. They’re loss leaders, basically. During the company’s Q3 2021 earnings call, Citi Chief Financial Officer Mark Mason said that about half of these promotional balances are not paid in full by the time the the 0 percent intro APR ends. At that point, the interest rate skyrockets, and suddenly this customer relationship can become very profitable for the card issuer.

How to use balance transfer cards to your advantage

While many balance transfer cards also tempt cardholders with 0 percent introductory APRs on new purchases, I suggest refraining from making additional purchases with these cards. The best way to use a 0 percent balance transfer card is to move your high-rate balances from one or more cards, and then divide what you owe by the number of months in your interest-free term and try to stick to that fixed payment plan.

There’s a time and a place for a 0 percent introductory rate on new purchases — for instance, spreading out the impact of a pricey item such as an appliance or a piece of furniture — but mixing this approach with existing debt makes the payoff process much more complicated. Essentially, it forces you to hit a moving target.

The typical credit card minimum payment formula is just 1 percent of the balance plus interest each month. If you only pay the minimum on a balance transfer card, you’re going to have to make up a big difference at the end to avoid a hefty interest rate. That’s why trying to stick to that level payment plan is a much better approach.

The math is brutal if you only make minimum payments on a credit card that charges interest. The average credit card rate is 17.67 percent, very close to a record high. If you owe $5,270 (the national average, according to TransUnion) and you make minimum payments at 17.67 percent, you’ll be in debt for 193 months (more than 16 years) and you’ll owe a grand total of $6,418 in interest.

This illustrates why a balance transfer card can save you so much money, provided you pay off your balance in a timely fashion. If you’re able to pay $251 per month, you could pay off that $5,270 in 21 months without any interest at all. (This doesn’t include the 3 to 5 percent transfer fee, which would run between $158 and $264 in our example, but that’s a small price to pay compared with the alternative.)

How to qualify for a 0 percent balance transfer card

You probably need good to excellent credit to qualify for one of the best balance transfer cards, which often means a credit score of 670 or above. The average American has a credit score of 716, according to FICO, so these offers are within reach for most people.

A bigger obstacle might be getting a credit limit high enough to transfer your entire balance. The past few years, card issuers have been stingier with credit limits than with approvals. The average credit limit for a credit card account originated in April 2022 was $4,993, according to Equifax. That’s down about 5 percent from $5,267 in 2019, even though more credit cards were originated in April 2022 than any other April on record. From April 2019 to April 2022, originations grew 23 percent.

In other words, if you have a sizable credit card balance (especially $5,000 or more), you might not be able to transfer your entire balance, especially if your credit score is less than pristine or your income is lower than the card issuer would like.

The bottom line

If you’re struggling with credit card debt, my favorite piece of advice is to use a 0 percent balance transfer card to pause that interest clock for up to 21 months. You could also consider alternatives such as personal loans (rates are as low as about 6 percent if you have good credit), nonprofit credit counseling and fundamentals such as earning more and spending less. An interest-free balance transfer promotion is probably the best way to get out of debt relatively quickly at the lowest possible cost.

Have a question about credit cards? E-mail me at ted.rossman@bankrate.com and I’d be happy to help.