How to Use a Balance Transfer Credit Card Wisely

Credit cards with balance transfers can be a powerful tool for those who want to reduce interest and pay off debts more efficiently.

However, to make the most of this feature, it’s essential to understand how it works and avoid common pitfalls.

In America, where credit is widely used, knowing how to use a balance transfer credit card wisely can make a big difference in financial health.

What is a balance transfer credit card?

As the name suggests, a balance transfer credit card allows you to transfer debts from other cards to a new card that offers a lower interest rate.

In some cases, the interest rate can be as low as 0% for a promotional period, which can help save a lot on interest, as long as the debt is paid off before the promotional period ends.

The 0% APR (Annual Percentage Rate) offer typically lasts between 12 and 21 months, depending on the card issuer.

After this period, the standard interest rate kicks in, which can be high if the balance hasn’t been paid off.

Step-by-step to use a balance transfer credit card wisely

Assess your financial situation

Before applying for a balance transfer card, review your current debts, including outstanding balances and interest rates.

A balance transfer is useful for those with high-interest debts, such as on conventional credit cards, who want to consolidate them into a single account with lower interest rates.

Choose the right card

Not all balance transfer cards are the same. Consider factors like the length of the 0% APR period, balance transfer fees, interest rates after the promotional period, and additional benefits for cardholders.

Transfer your balance immediately

Once the card is approved, transfer your balances as soon as possible to start saving on interest. The process may take a few days, so continue making the minimum payments on the old cards until the transfer is complete.

Create a repayment plan

The main pitfall of balance transfer cards is accumulating more debt or failing to pay off the balance within the promotional period. To avoid this:

• Divide the balance by the number of months in the promotional period and aim to pay at least that amount each month.
• Set up automatic payments to avoid late payments.
• Avoid using the new card for purchases until the transferred balance is paid off.

Avoid accumulating new debt

A common mistake is continuing to use the old cards while paying off the transferred balance. This can lead to an even more challenging situation. Ideally, focus on paying off the debt before making new credit purchases.

Monitor your credit

Transferring balances can affect your credit in different ways. Initially, there may be a slight drop in your score due to the new card application.

However, if you reduce your credit utilization and make on-time payments, your score can improve over time.

Be aware of the end of the promotional period

Mark the end date of the 0% APR offer and ensure your debt will be paid off by then. Otherwise, you could end up paying high interest on the remaining balance.

When a balance transfer credit card might not be the best option

Although balance transfer cards are useful, they’re not always the best solution. If the savings on interest are smaller than the fee charged for transferring the balance, it might not be advantageous.

If there’s a risk of carrying a high balance after the promotional rate expires, it may be better to consider other options, such as a personal loan with low interest rates.

For those who struggle with managing credit, a balance transfer may just be a temporary fix.

Alternatives to Balance Transfer

• Negotiating interest rates: Some financial institutions may reduce interest rates if you have a good payment history.
• Personal loans with lower interest rates: Depending on your credit score, you might be able to secure a personal loan with more affordable rates.
• Debt consolidation: Some companies offer programs to consolidate multiple debts into a single monthly payment with reduced rates.

Written by

Gabriel Gonçalves