Is a Balance Transfer Offer a Good Deal?

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A credit card balance transfer is a practical way to consolidate debt, save money, and ditch a high-rate credit card. This involves transferring the balance from a higher-interest credit card to another, lower-interest credit card.

There are various balance transfer offers, but unfortunately, not every offer is financially rewarding. To know whether you're getting a solid deal, you have to consider the costs associated with a particular offer.

Balance Transfer Fee

In a perfect world, there wouldn't be any fees to transfer a balance — or at the very least we would pay a low, flat fee — but this is rarely the case. The typical fee is 3%-5% of the transferred balance.

Balance transfer fees are charged directly to the card balance and reduce the actual savings of switching to a low-rate card. For example, if transferring your balance to a low-rate card saves $900 in interest, but you paid a $200 balance transfer fee, you actually only saved $700.

Since nearly all cards have no cap on how much you pay, the bigger your transfer, the bigger the fee — hence the importance of comparing different balance transfer offers to make sure you're getting a deal. Shopping around can be the difference between paying $300 and $500 for a $10,000 balance transfer.

See also: Fastest Way to Pay Off $10K Credit Card Debt

There are, however, a few cards that don't charge a balance transfer fee. If you're transferring a big balance, these card offers should be worth consideration. (See also: Best Credit Cards with No Balance Transfer Fee)

Longest 0% APR vs Low Standard APR

For a balance transfer offer to make sense, the interest savings should be significantly greater than any fees paid to transfer your balance. To win your business, many cards offer an introductory 0% interest for a set period.

There are currently offers of 0% APR up to 21 months. This teaser rate eventually disappears, but if you pay off your credit card balance before the regular interest rate kicks in, you don't pay a penny of interest.

However, some people make the mistake of only looking at the introductory rate when selecting a card, and they forget to consider the ongoing or regular APR once the promotional period ends.

When you don't compare rates, you could unknowingly apply for a card with a regular APR that's higher than what you're currently paying. Which isn't that awful if you pay off the card during the introductory rate period. But if you don't pay off the entire balance before the end of the 0% APR period, the new interest charges might cancel out some of the potential savings.

Let's say you have a credit card with a $2,000 balance and a 20% interest rate. If you transfer the balance to a card with 0% interest for 12 months and a balance transfer fee of 3%. You'll save about $340 over the introductory rate period.

If the card had a 16% regular APR, you'd save about $7 per month after the intro 12 months. But if you qualify for a card with a regular interest rate of 10%, you would save $17 per month.

Ideally, you want to find a card that has both a long intro 0% APR period and a low regular APR afterwards. (See also: Best Method to Eliminate Credit Card Debt)

The Low Rate May Not Apply to New Purchases

The rules regarding interest and balance transfers vary, so it's important to read the fine print and understand an offer before you apply — or else you could end up paying interest unexpectedly.

Some credit cards have 0% introductory rates that apply to both new purchases and balance transfers, whereas other cards only apply the teaser rate to balance transfers. So if you transfer a balance to a card, and you also use this card for new purchases, you'll have dual interest rates and you'll pay regular interest on all new purchases.

To keep it simple, choose a card that offers a promotional rate on both purchases and balance transfers. 

Protect Your Credit When Transferring a Balance

Applying for a new credit card and transferring your balance can potentially harm your credit score — but only if you do it the wrong way.

A new card triggers an inquiry on your credit report, and each inquiry can drop your credit score by a few points. This isn't the best news, but at the end of the day, it isn't a big deal as long as you don't apply for too many new accounts in a short span of time.

As mentioned, a balance transfer is one way to simplify your finances. You can transfer all your balances to a new card and only worry about one monthly payment. The problem, however, is that a balance transfer could throw off your credit utilization ratio if you cancel the old card that no longer has a balance on it.

Credit utilization is your percentage of outstanding balances compared to your total credit limit. This ratio should never exceed 30%, and if your ratio is higher than this percentage, your credit score suffers.

The way you approach a balance transfer can either help or hurt your credit score. To illustrate, imagine you have two credit cards:

• Credit card #1: $1,000 balance with a $2,000 credit limit
   
• Credit card #2: $4,000 balance with a $5,000 credit limit

In this example, you owe a total balance of $5,000 with a total credit limit of $7,000, resulting in a total credit utilization ratio of 71%, which is more than doubled the recommended max percentage of 30%.

Let's say you then get a new credit card with a credit limit of $10,000 and transfer both balances to this card, this new card increases your total available credit to $17,000, which drops your credit utilization ratio to 29% — but only if you keep the old paid-off accounts open!

If you're going to open a new account and transfer balances, don't immediately start closing accounts. Run the numbers first, and only close accounts if your credit usage is no more than 30%.

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