How a Balance Transfer Card Can Help Your Budget

What is a balance transfer credit card? Think of it as a way to consolidate and pay off existing credit card and other debt much like bundling loans into a single consolidation loan.

Although not a new concept, the balance transfer credit card has come back in a big way as promotional campaigns for credit card companies such as Visa and MasterCard, who offer introductory zero interest on their balance transfer credit cards. This could be a good deal if you have a lot of credit card debt and are having difficulty making the monthly payment(s), especially if that debt is spread across multiple cards for gas, department store and grocery expenses. Multiple cards require multiple monthly payments.

Here are some things to think about if you are considering applying for a zero-interest balance transfer credit card.

Do Your Research

First, do a lot of research since there are many different types of these cards offering a diversity of terms, such as a wide range of variable interest rates (APR), transfer fees and different grace periods for the zero interest.

So, what about interest rates? Although there are a few credit cards that offer fixed rates, most of the balance transfer credit cards charge variable rates as well as a promotional zero percent interest rate for a certain period of time.

A quick Google search turns up at least seven credit unions offering balance transfer credit cards. A Huffington Post survey named NASA Federal Credit Union, TruWest Credit Union, TruService Community Federal Credit Union; Clark.com cites PenFed Credit Union and Bank Fund Staff FCU; and websites for Navy Federal Credit Union and Apple Federal Credit Union also provide offers. And, it’s a simple matter to extend your search to a credit union near you.

Good Credit History Often Required

This brings up another point, and that is to qualify for a zero-interest balance transfer card, the applicant often must have good to excellent credit history with a FICO score in the 700 to 850 range. If you have a 700 FICO score, the credit card issuer will take that into account when it issues the balance transfer card and may place a limit on the amount that you can transfer, such as $5,000.

So, if you have $7,000 in card debt, you will only be able to transfer $5,000, which means you still have $2,000 on another card that you must continue to pay off. Now you have two payments to make instead of one, which could stretch your budget even more and may defeat the purpose of the applying for the balance transfer card in the first place.

What about the time span that a zero-interest rate is in effect? Every credit card issuer is different, so when reviewing options for a balance transfer card, the length of the zero-interest introductory offer can be the single most important consideration, according to SEO Manager Connor Wrenn, who writes for Creditcards.com. For example, the promotion may be zero percent for 12 months or it could be as short as six months or as long as 21 months. Generally, the longer, the better, Wrenn states.

Zero Interest Makes a Difference

The zero interest can make a difference. For example, if you’ve been paying 13 percent interest on a $2,000 debt on a traditional credit card, you’d have to make a $347 monthly payment for six months to pay off the debt. Transfer that $2,000 to a zero percent card and your payments will be $334 and you will save $77 in interest.

Since the zero-interest promotional rate is just that – promotional – it comes to an end; it could be in six months, 12 months or possibly longer. After the promotion expires, the rate could jump to a possible low of 12 percent or a high of 18 percent – it could be lower or higher depending in your credit history and FICO score. Know what the rates are before you sign on.

Keep in mind that issuers of balance transfer credit cards might specify that only transferred balances qualify for the zero-interest rate, while new purchases are at the card’s higher interest rate. However, some cards do apply the introductory interest rate to new purchases.

Consider the Transfer Fee

Finally, the other important factor to take into consideration is the balance transfer fee, which is charged by some 90 percent of the balance transfer card issuers. The most common fee is 3 percent of the amount transferred, but it can be zero and it can be as high as 5 percent, depending on the issuer.

If the transfer fee is 3 percent and you transfer $5,000, the fee is $150. It may or may not be worth making the transfer depending on the interest rate once the zero rate expires. That’s why it’s important to read the fine print and know fully the pros and cons of switching before you commit to transferring your debt to a new card.