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 stewarding it well.
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. That way, we can take advantage of the pros of using credit cards without any of the drawbacks.
But let’s be honest, this is not the reality that most people live in.
Sometimes credit card bills can get away from you and you find yourself in a situation where you are paying interest on your balance.
This is where balance transfer cards can help.
In this overview we are going to talk about how balance transfer cards work, how to pick the best one for your situation, and talk about some of the best offers on the market right now.
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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 with low or zero introductory interest. The introductory interest is the important factor here; there is no point in transferring balances between cards otherwise.
Once transferred, you will typically be given about 12-18 months of low or no interest on your new balance. This, 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. On top of that, the introductory interest is typically followed by an interest rate that is a bit higher than most other cards in the industry.
In some cases, you might even be subject to deferred interest on the total amount transferred.
This makes balance transfer cards a powerful short-term tool to wipe out debt when used responsibly, but a dangerous strategy when used to prolong your debt problem.
So, how will a balance transfer card affect 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 percentage of your total credit lines that you are using. To calculate this, divide your credit balances by your 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, as credit inquiries do not affect your credit score as much as utilization does.
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. In fact, this is a good rule of thumb in general because length of credit history also has an impact on your credit score. The longer your credit history, generally the better.
Contrary to popular belief, using a balance transfer card will likely improve your credit score
There are three main things to look for when considering a balance transfer card.
While there are some exceptions, almost every balance transfer card charges a balance transfer fee. This fee is generally between 1-5% 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.
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.
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.
A large number of banks have pulled their balance transfer cards off the market due to the financial impact of COVID-19, so your choices are a bit more slim than usual.
But there are still a few good options to choose from.
Let’s take a look at some of the best balance transfer cards on the market
There are a handful of other balance transfer cards to consider that do not currently have a relationship with 10xTravel. In particular we would recommend that you check out the following options:
after you spend $1,500 in purchases with your card within 3 months of account opening; redeemable for $200 in gift cards at thankyou.com. Plus, for a limited time, earn 5 ThankYou® Points per $1 spent on hotel, car rentals and attractions booked on the Citi Travel℠ portal through June 30, 2024.
Balance transfer cards can help you save money and improve your credit if you use them correctly. Just be sure that you are using them to pay down credit card debt and not to simply defer the problem.
What should I look for in a balance transfer credit card?
You should look for a balance transfer card that has a long 0% APR period and low balance transfer fees. Also, you need to find a balance transfer card that is issued by a different bank, as no major bank will allow you to transfer balances from one of their cards to another.
What credit score is needed to qualify for a balance transfer credit card?
It’s hard to give an exact answer to this question because there are many variables that are factored in. In general, balance transfer cards have a lower credit score requirement than other premium cards. I would say that it’s worth applying for a balance transfer card if your score is anywhere above ~620
Can I open multiple balance transfer cards?
Yes, and this is often times a good strategy for anyone who needs to transfer a large amount of credit card debt. It’s a good idea to apply for balance transfer cards from multiple different banks if you need more than one.
Does a balance transfer help your credit score?
In most cases yes, provided that you do not use the balance transfer card to increase your credit card debt.
What should I do with my old card after transferring the balance?
In most cases you will want to keep the old card open and active, even if you rarely use it. This will help to boost your credit score. Just be sure not to fall back in to old habits and start spending on it again to accrue more debt.