Credit cards carry high interest rates. We're talking an average APR of over 16%. As a result, if you have a revolving credit card balance, you might be wondering whether doing a credit card balance transfer to a credit card with a 0% introductory APR is a good idea.
The overall answer is: most likely. But before you do, you should understand some metrics as well as the pros and cons.
If you're paying the average credit card interest rate or higher, you should feel sick to your stomach. At such a high rate, it becomes very difficult to ever get out of credit card debt.
I'm glad you're here to learn more on how to save on interest and build your wealth. I started Financial Samurai in 2009 to help readers do just that. Today, Financial Samurai is one of the top independently owned personal finance site with over 1.5 million organic readers a month.
Determine How Much You Will Save With A Balance Transfer
To determine how much you will save if you conduct a credit card balance transfer, you must know the following:
- Current APR you are paying
- The length of the 0% introductory APR for the new card
- The best balance transfer credit cards today
- How long you estimate it will take you to pay off your balance
- The balance transfer fee
Bottom line: After calculating the numbers, if you will save more interest expense in the time you plan to pay off your debt versus paying for the balance fee, then conduct a balance transfer.
A Good Example Of Doing A Credit Card Balance Transfer
A credit card balance transfer is supposed to save you money. Otherwise, you shouldn't do it. Let's go through an example.
Let’s imagine you have $12,000 worth of debt on a high-interest credit card with a 29% APR.
In one year, $12,000 x 0.29 = $3,480 in interest alone. At this rate, it's going to be very hard to pay down your credit card debt.
If your interest is $3,480 over 12 months, that’s a $290 interest payment that NEVER gets applied to paying down your debt principal.
What If You Can Only Pay The Minimum Payment?
Now let’s imagine you could only afford to make the minimum payment of $300 towards your credit card balance. That means every month you’d pay $300 towards your balance + $290 in fees, totaling $590. At this rate, paying $590 per month, roughly half of which is going to pay interest means 2 – 3 years to pay off your debt!
Instead of spending three years to pay down your debt because of the 29% insidious APR, you may want to sign up for a 0% APR balance transfer credit card.
If you had a 0% interest credit card that offered you 15 months to pay off your balance of $12,000, the entire monthly payment of $590 you were paying would be applied to your balance.
$590 X 15 = $8,850 in debt you would have paid down versus only $4,500. A $4,350 debt pay down difference is HUGE!
Now you have to compare the $4,350 debt pay down difference to the balance transfer fee of 3%. 3% X $12,000 = $360.
In this scenario, transferring your balance to a great 0% APR credit card makes a ton of sense because $4,350 > $360.
Favorite Balance Transfer Credit Card
At the moment, most major issuers have paused 0% intro APR on balance transfer offers. But you can still find great cards with 0% intro APR on purchases.
My favorite credit card is the Chase Freedom Unlimited credit card.
The Chase Freedom Unlimited card offers a 15-month introductory 0% APR on new purchases plus a generous unlimited 1.5% cash back on all purchases. You can also earn a FREE $200 bonus after you spend $500 in the first three months after opening an account.
I’ve been a client of Chase for over 10 years and the Freedom Unlimited card is my top choice in this best balance transfer credit cards review. Here are the card’s best features:
Key Benefits
- Balance transfer fee = 3%
- 0% introductory APR on purchases for 15 months
- $200 bonus after spending $500 in the first 3 months
- Get unlimited 1.5% cash back on all purchases
- No annual fee
- Redeem cash back with no minimums
Here are some more commonly asked questions about doing a credit card balance transfer you are aware of.
How Does A Balance Transfer Affect A Credit Score
Every time you apply for or open up a new line of credit, your credit score MAY be negatively effected by a couple points. But mostly likely, your credit score will be unaffected.
New credit only accounts for 10% of your credit score. The main things that count towards getting a good credit score are:
- Payment History (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- New credit (10%)
- Types of credit used (10%)
So long as you pay your bills on time, keep new credit inquiries to less than once every three months, and aren't maxed out on your credit limits, you'll be fine.
Patience Rewards Improved Credit
Over time, your credit score will naturally get better. It took me around 15 years after college to finally get above a 800 credit score. When I did, I was able to get the best terms when I refinanced my mortgages, which will end up saving me hundreds of thousands of dollars in interest over time.
Longer term, doing a balance transfer may actually be good for your score. Why? Because if you have more total credit and a lower utilization rate, these two variables are helpful.
Just make sure you are disciplined in your spending and credit card usage habits, especially once you make a 0% APR credit card transfer.
Ultimately, paying down your balance will raise your credit score incrementally over time. If you can do that faster with a balance transfer credit card, the net effect on your credit score should be positive.
Here's a detailed post I wrote highlight the best rewards credit cards by credit score. The post has a credit card for those with terrible credit and those with excellent credit.
Don't Go Crazy Transferring Your Balances
Getting to pay 0% interest on a balance feels great. I did that a couple times in my 20s. The problem lies in getting hooked on 0% balance transfer offers by opening up too many new credit cards and never paying them off.
There are people who jump from balance transfer card to balance transfer card, accumulating more revolving debt that they never pay off because they haven’t saved for unexpected expenses.
As a result, they are stuck on a consumption treadmill, and can never achieve financial independence, which is really what Financial Samurai is all about. Instead, focus on the bigger picture by making more money.
Once I got my spending habits and debt under control, I fought like crazy to max out my 401(k) and build up a large after-tax passive income portfolio so I could one day leave my day job and be free.
A credit card is a tool for your benefit. Don't let the tool control you.
The Best Balance Transfer Credit Cards
The following are my top two favorite balance transfer credit cards:
- Chase Freedom Unlimited credit card – I own this card and highly recommend it.
- Capital One Quicksilver Rewards Credit Card – This is one of the most popular cash-back rewards credit cards today.
You want to stick with the best credit card companies that provide the best features and the lowest fees. Chase and Capital One are the best credit card issuers today.
Run the numbers, transfer your balance, and save on interest expense. Then make a promise to yourself to maintain a budget and spend within your means.
Pay Off Your Credit Card Debt Faster With A Personal Loan
If you don’t have enough cash, getting a personal loan from Credible is a good place to start. If you have expensive credit card debt, consider consolidating your debt into a lower interest-rate personal loan.
Credible has the most comprehensive marketplace for personal loans. Lenders compete for your business so you can get the best rate. Get personalized prequalified personal loan rates in just two minutes after you fill out an application.
About The Author
Sam worked in investment banking for 13 years at Goldman Sachs and Credit Suisse. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $350,000 a year in passive income.
Financial Samurai was started in 2009 and is one of the most trusted personal finance sites on the web with over 1.5 million pageviews a month.
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Disclosure: Credible Operations, Inc. NMLS# 1681276, “Credible.” Not available in all states. www.nmlsconsumeraccess.org.
Disclosure: Credit card terms and features are subject to change.