By Scot Finnie | American Express Credit Intel Freelance Contributor
7 Min Read | January 31, 2020 in Cards
Used appropriately, a 0% balance transfer credit card—which charges no interest during a temporary introductory period—could be among your best tools for paying down credit card debt. Used unwisely, these cards can hurt you in several ways, from lowering your credit rating to causing you to pay more in interest charges than you otherwise might.
But if you choose a credit card with no balance transfer fee and commit to paying off your debt during the initial 0% period (typically ranging from 12 to 18 months), you can save hundreds of dollars—or more—in interest charges and reduce your debt.
The challenge is, almost all 0% balance transfer credit cards charge a transfer fee. Most balance transfer credit cards charge 3 to 5% of your transfer balance. So, if you're transferring $6,000 in credit card debt, your balance transfer fee would be $180 to $300.
Here are seven rules experts recommend to help you come out on the good side of 0% balance transfer credit cards.
Start by figuring out how many months you want to make payments, and how much you can afford per month, and then apply for cards that match your needs. It won’t make a lot of sense to get a card with a 12-month introductory 0% interest period if you’re transferring $8,000 and can’t afford the over $650 a month needed to pay it off before interest kicks in.
There are credit cards with no balance transfer fee that provide nine, 12, 15, 18, 20, and 21 months at the 0% level. For high balances, another strategy is to transfer only the subset of the balance that makes for payments you can commit to comfortably.
The bottom line is, you want to succeed in paying off your balance in the introductory 0% period.
Look for the unicorns: credit cards with no balance transfer fee. You never know what might pop up. If you find one, you’ll likely need a high credit score to get approved.1 But it is a unicorn, after all. If you don't land a no transfer fee offer, expect to pay a 3% transfer fee. A quick Google search should reveal several offers at that rate—you may want to consider it as your max.
It’s always important to make debt payments on or before the monthly due date, but especially with 0% balance transfer credit cards. That’s because a card issuer can suspend your 0% introductory interest rate early if you miss or are late with a payment. The result could be an annual percentage rate (APR) as high as 25% or more. And some card member agreements allow the card issuer to retroactively charge you the new interest rate from the point at which you made the balance transfer.
Another reason to pay on time is that consistently doing so usually raises your credit rating.
Remember the “bottom line” mentioned in No. 1: the best strategy with 0% balance transfer cards is to pay the full balance by the end of the introductory period. If you don't pay as much per month as you planned, you may still have a high interest rate and a balance left to pay after the introductory period. You could apply for another 0 interest balance transfer card—but that means you’ll be paying transfer fees twice on the same debt. You’ll have to do the math to see whether you'll still save money this way. Another option is to pay off the balance whatever way you can as fast as possible.
You might be tempted to skip over reading the fine print—but it pays to look out for the details. Here are three areas where close attention can pay off:
Does the card from which you transferred the balance still appeal to you? Does it still have the bells and whistles—in other words, reward points, cash back, etc.—that you prefer? Even if so, it’s not a good idea to use your old card while you're using your balance transfer card to pay off your balance. Once the balance is paid, if you prefer the old card, just switch back.
But you may not ever want to cancel either card—together, they give you a higher aggregate credit limit, which helps to raise your credit score.
Applying for any new credit card entails what's known as a "hard inquiry" credit check. That could lower your credit rating slightly. So, it's important not to apply for several cards—it's not like applying to college. Also, because it’s new, your 0 interest balance transfer credit card could bring your credit rating down slightly by decreasing the average age of your credit history.
On the flip side, your new card adds to your aggregate credit limit. If you're following best practices, you'll be using your old credit card less. Credit bureaus generally look for a low (around 30%) credit utilization rate—a ratio of the balance you carry versus your total available credit. The upshot is that the new card could raise your credit score as long as you don’t start spending more.
In the end, though, the most important effect on your credit rating will be how you use your new card. Use it as it was intended, to pay down your debt while making all your payments on time, and you have a good chance to see your score rise.