Credit card balance transfers can be helpful if you’re trying to consolidate or repay debt, and could save you money. Or they could cost you if you don’t do your homework.
For example, on a credit card balance of $5,000, with an interest rate of 15.4% and making the minimum payments, it would take you 22 years to pay off the debt, plus the $6,010 in total interest you would end up paying over that time.
But if you transferred that balance to a card with a 10.4% interest rate and maintained a payment plan of $100 a month, it would take six years and $1,651 in total interest.
Advice Director Mikel Van Cleve, a CERTIFIED FINANCIAL PLANNER™ with USAA, recommends comparing cards and taking these steps before and after a credit card balance transfer:
Understand terms and fees. Many banks charge transfer fees and offer promotional rates that eventually expire. So it is wise to compare cards. On some cards, the lower rate only applies to balances transferred, not to new purchases. If you transfer a balance to a higher interest rate credit card, or to a card you can’t pay off before the promotional rate period ends, you may end up paying more over time.
Choose a lower interest rate, but not a lower credit limit. Never transfer a balance to a credit card with a higher interest rate. Also be careful transferring the balance to a card with a lower credit limit. This may also reduce your credit score.
Keep making payments. Be sure that you are prepared to pay at least the minimum payment on the original card until you are certain the transfer is approved.
Develop a pay-off plan. Know when the promotional rate ends so that you can pay off the balance in full before that date. Once you have accomplished that goal, keep debt under control by paying off the balance each month.
Don’t close the original account. You don’t want to make purchases on the original card and add to your debt, but opening and closing accounts could lower your credit score. “However, if you know you will charge up the older account again, you may be better off closing the account and taking any potential hit to your credit versus racking up even more debt,” Van Cleve says.
Do not continually transfer balances. High transfer fees could end up costing you more in the long run, and opening too many new accounts could negatively affect your credit score. “While this strategy can work if you aggressively attack the debt during the promotional period, it can also hurt you,” Van Cleve says.
Change spending habits. Create and follow a budget to help you spend less than you earn. Build an emergency fund so you aren’t relying on credit cards to pay for the unexpected.
The most important thing to remember is not to transfer a balance only to free up credit that you’ll use up again. The next thing you know, you could have more debt, higher payments and a lower credit score.
For active-duty service members, USAA waives fees on credit card balance transfers and convenience checks during a PCS or deployment, and offers a special low APR on new and existing transactions for one year.¹ They also cap a credit card balance transfer fee at 3% or $200, whichever is less.
Transfer a credit card balance today. Learn More
¹We must receive notice within 365 days after your PCS report date or return from deployment. We reserve the right to require documentation.
This credit card program is issued by USAA Savings Bank, Member FDIC.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNERTM in the United States, which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.