By: Bryce Conway
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It’s no secret that we here at 10xTravel are big fans of earning points and miles through the responsible use of credit cards. These rewards are essentially “free money” that is given to you just for using a particular credit card.
And, in our little 10xTravel fantasy world everyone uses rewards credit cards responsibly, pays their bills in full each month, and never pays a dime of interest to credit card companies. Getting all the positives out of using credit cards with none of the drawbacks.
But the reality is that many credit card users do not behave that way. According to Nerd Wallet, slightly under half of US households have credit card debt. Of those that do, the average outstanding balance was $16,747.
This adds up to an average of about $1,300 per year in interest charges alone. Ouch!
But it doesn’t have to be that way. In fact, this issue can be solved with a somewhat counterintuitive solution; more credit cards.
Specifically, a type of card called a balance transfer card. Let’s talk about how they work.
How do Balance Transfer Cards Work?
Balance transfer cards do exactly what their name implies, they allow you to transfer balances from other credit cards to your new balance transfer card. The idea being that you transfer balances from cards with higher interest rates to a new card with a low or 0% interest rate.
Once transferred, you will typically be given about 12-15 months of low or no interest on your new balance. Which (in theory) allows you to pay off your debt faster and with less money lost to interest expense.
So what’s the catch?
The catch is that the low or 0% interest rate only applies for a short time. And is typically followed by an interest rate that is higher than most other credit card offers.
In some cases, you might even be subject to deferred interest on the total amount transferred.
Making balance transfer cards a powerful tool to wipe out debt when used responsibly, but a dangerous strategy when used to prolong your debt problem.
How Will This Affect Your Credit?
So, how will a balance transfer card effect your credit? The answer may surprise you.
In many cases, a balance transfer card might actually improve your credit score. This is mainly due to a reduction in your credit utilization rate, which is the second biggest factor in determining your credit score.
Put simply, your credit utilization rate measures the % of your total credit lines that you are using (credit balances/credit limits). High utilization can negatively impact your credit score, even if you are paying your bills on time every month.
By opening a balance transfer credit card you are increasing your available credit, which lowers your utilization percentage and therefore will likely improve your credit score.
The positive effect of this change will almost always outweigh the small negative effect of a hard inquiry on your credit report.
The key to all of this, of course, is that you keep your old credit card open after transferring the balance. Closing it will remove the available credit from your credit report and cause your utilization to rise.
What to Look for in a Balance Transfer Card:
There are three things to look for when considering a balance transfer card.
1) How much is the transfer fee?
Almost every balance transfer card charges a balance transfer fee. This fee is almost always 3-5% and is usually tacked on to your new balance (i.e. assuming a 3% fee, a $10,000 balance transfer would become $10,300).
Nobody likes paying fees, but the 3% is almost certainly going to be cheaper than a few more months of paying interest on your credit card balance.
There is one card that does not charge a balance transfer fee. We will talk about it in a moment.
2) What is the promotional interest rate?
The longer the promotional interest rate period, the better. A longer period gives you more time to pay off the balance without being charged interest.
Make sure to also read the fine print on what happens when the promotional rate expires. Ideally it won’t matter, as you should plan to pay the balance off completely before this happens, but it’s better to know than not.
3) Which bank issues the balance transfer card?
Most balance transfer cards will not accept balances from their own bank so you will want to double check that the card is provided by a different financial institution.
I see this mistake frequently with co-brand cards such as the United MileagePlus Explorer (issued by Chase) and the American Airlines AAdvantage Card (Issued by Citi).
But what about points/miles? Should I look for a balance transfer card that offers some sort of rewards?
Don’t bother. Balance transfers almost never earn rewards and most balance transfer cards don’t offer points/miles anyway. Focus on wiping out your credit card debt before worrying about points and miles.
What Balance Transfer Cards Are Best?
Let’s look at our top 3 balance transfer card options:
1) Chase Slate
- $0 Introductory balance transfer fee for transfers made during the first 60 days of account opening
- 0% Introductory APR for 15 months on purchases and balance transfers
- Monthly FICO® Score and Credit Dashboard for free
- No Penalty APR – Paying late won’t raise your interest rate (APR). All other account pricing and terms apply
- $0 Annual Fee
Chase Slate is widely considered to be the best balance transfer card on the market because it does not charge balance transfer fees on balances transferred in the first 60 days. The interest-free period is 15 months.
Chase Slate also does not charge an annual fee, meaning that if you pay your balance off within 15 months you will pay exactly $0 in interest and fees.
I highly recommend starting with Chase Slate unless you need to transfer a balance that is currently on a Chase card.
2) Citi Simplicity
- 0% Intro APR on Balance Transfers and Purchases for 21 months.
- There is a balance transfer fee of either $5 or 3% of the amount of each transfer, whichever is greater.
- The same great rate for all balances, after the introductory period.
- Save time when you call with fast, personal help, 24 hours a day – just say “representative”
- Enjoy the convenience of setting up your own bill payment schedule on any available due date throughout the month.
Citi Simplicity is an excellent choice because it offers the longest 0% period on the market, a full 21 months. Citi does charge a 3% balance transfer fee on this product, though you will find a similar fee on almost every other card (other than the aforementioned Chase Slate).
The Citi Simplicity also provides you with a free FICO credit score, which is great for those who are using balance transfer cards to repair their credit.
3) Discover It
- Get a dollar-for-dollar match of all the cash back you’ve earned at the end of your first year, automatically.
- Earn 5% cash back in rotating categories each quarter like gas stations, Amazon.com, restaurants, wholesale clubs and more, up to the quarterly maximum each time you activate.
- Plus, unlimited 1% cash back on all other purchases.
- Redeem your cash back for any amount, any time. Cash rewards never expire.
- 100% U.S. based customer service.
- Get your FICO® Credit Score for free on monthly statements and online.
- No annual fee.
The Discover IT is the only balance transfer credit card that may be worth keeping long-term. Discover It offers 0% interest for 18 months on balance transfers (0% for 6 months on purchases) and charges a balance transfer fee of 3%.
Like the Simplicity, Discover It also offers a free FICO credit score every month.
With Discover It you’ll also earn 5% cash back on rotating categories each quarter and 1% on all other purchases. Making it one of the better cash back cards on the market.
Balance transfer credit cards can save you quite a bit of money on interest while you wipe out your credit card debt. Just be sure to use them responsibly and read the fine print.