Paying off your credit card bill and not having a balance is the best way to avoid interest charges. But there’s another way to not pay interest on a credit card balance — a balance transfer.
There are right ways and wrong ways to do a credit card balance transfer, however, and doing it the wrong way can cost you money, so it’s important to know how credit cards work. Here are some ways to make a balance transfer work for you:
Go for zero or nothing
A zero percent balance transfer is what you should be looking for. It will allow you to transfer your credit card balance to another credit card without paying any interest on the balance for a certain amount of time — usually for six to 21 months, with 18 months being common.
The goal is to pay off the amount being transferred before the interest-free period ends. If you’re paying interest on a balance transfer, you’re probably better off sticking with your original credit card.
If you have a very high interest rate on your current credit card, it may seem worthwhile to transfer the balance to a credit card with a lower interest rate, even if it doesn’t have a zero percent introductory rate. That can still save you money, but there are plenty of zero interest balance credit cards out there, so you should be able to find one.
When shopping for a balance transfer credit card, look for one that doesn’t have an annual fee and either has a low balance transfer fee or none at all.
Balance transfer fees are common. A common fee is $5 or 3 percent of the transfer amount, whichever is greater. Some cards have neither, such as no balance transfer fee within 60 days of opening the card. After that, it may charge a $10 or 3 percent transfer fee, which is a good reason to transfer balances immediately after opening a new credit card.
Pay off the 0% balance
This should go without saying, but the point of a zero interest balance transfer is to pay off the balance before the zero percent APR expires. Paying off part of the balance is good, but you’ll end up paying interest on the remainder.
This is why it’s important to find a credit card with the longest zero percent interest offer — hopefully for a year or more. That way, you can easily figure out how much you’ll have to pay each month to pay it off.
If you transfer $5,000 to a card with no interest charges for 12 months, you’ll pay $417 per month to pay it off in a year. But extend that to 18 months and your monthly payment drops to $278. Those extra six months can make it a lot more affordable.
Know the APR
Some balance transfer cards won’t charge interest on new purchases for a period of time, such as six months, while others will charge a variable annual percentage rate, or APR, immediately.
You should know what APR you’ll be paying on purchases and balance transfers, and when they kick in. If your new card charges interest for balance transfers — either immediately or a year from now — it will probably be higher than the interest rate charged on purchases. Also make sure the interest rate isn’t higher than what you’re paying on your current card.
Don’t take on more debt
A balance transfer to a new credit card is a quick way to increase the amount of credit you have available to you. That can leave you with more money to spend, putting you at risk of increasing your debt.
Since the original goal of a zero interest balance transfer card is to pay off that debt without paying interest, then adding more debt to your new credit card defeats the original purpose.
Use this chance to get out of debt to be disciplined enough to to make purchases on your old credit card or new credit card. Close your old credit card if it helps you avoid the temptation to spend.
Avoid credit score problems
If you don’t have an excellent credit score, you may not qualify for a promotional rate of zero percent. That may be enough to stop you from transferring a balance.
A balance transfer could hurt your credit score if not done right. Just opening a new credit card account can affect your credit score, as can having a credit card balance above 30 percent of your credit limit.
To avoid that credit score hit, find a credit card that offers you a high enough amount of available credit so that your balance transfer doesn’t increase your total balance to more than a third of your available credit.
Paying off part of the balance each month will drop your credit utilization number, which should improve your credit score over time.