The Federal Reserve’s recent interest rate hike makes carrying credit card debt even more expensive for card holders, and many have started looking toward balance transfer cards to help them get out from under that debt, according to CompareCards’ 2018 Balance Transfer Credit Card Report. But while balance transfer cards provide a good opportunity for debt-loaded consumers to get ahead of their credit card bills, thanks to the low-or-zero interest rate they charge for a specific period of time, many cardholders aren’t paying off their debt quickly enough. The result? Of the 41% of Americans who have used a balance transfer card in the past, 4 in 10 failed to pay off the balance in full during the special-rate period and incurred easily avoidable interest fees.
How to use a balance transfer card the smart way
Card holders who want to save money use transfer balance cards to consolidate their debts and reduce their interest rates. The strategy is simple: Open up a new credit card account and move your existing credit card balances to it. The key to savings is for the transfer credit card to have a lower APR than your current credit cards. Many times, a transfer balance card will offer a 0% interest promotional period that can last anywhere between 9 and 21 months.
Before you apply for a new card, take note of the what the interest will be once the introductory offer ends, especially if you anticipate having a significant amount of debt, because you don’t want to be stuck paying a higher interest rate. Also, pay attention to how much of your minimum payment will be applied to the higher-rate balance—only a certain amount above the minimum will be credited toward the balance amount with the highest rate.
Most balance transfer credit cards will impose a 3% to 5% fee when you transfer over a balance from another card but you will still benefit by lowering or deferring interest for 3 or more months, despite the added fee. You’ll also want to avoid missing or being late on a payment because that will end the low interest or zero percent period.
Opting for a balance transfer card could have an impact on your credit score. When you apply for a new line of credit the inquiry on your account—often referred to as a "hard pull"—will cause your FICO score to take a hit. Also, if you end up using a big partition of the new credit card’s total credit limit, your credit score will go down. You want to keep your credit utilization, that is, the amount you use of your available credit line, under 30%. For example, if your total credit line is $1,000, you shouldn't be using more than $300.