5 mistakes to avoid with balance transfer cards
If you're looking to transfer your credit card balance to a new or existing card, make sure you avoid these five potentially costly mistakes.
Head of Growth at Tally
September 28, 2022
Thousands of Americans turn to balance transfer cards every year to get a handle on their credit card debt. While a balance transfer credit card can be a great way to consolidate your credit card payments and save money on interest, there are a few pitfalls you'll want to avoid if you don't want to jeopardize your efforts. Read on to find out more.
What are balance transfer cards?
Let’s start at the basics. A balance transfer is when you move the balance of one or more high-interest credit cards to a new or existing low-interest credit card. The card that you transfer the balance to is usually called a “balance transfer card.”
The length of the balance transfer process can range from a few days to several weeks, depending on the credit card issuer and circumstances.
How do balance transfer cards work?
When you carry out a balance transfer to a new or existing card, you will typically get a 0% interest rate for a specified period of time. The 0% interest rate lasts anywhere from 12 to 18 months, depending on the card. During this period, you can chip away at your debt without incurring any interest. It’s that simple.
Say your current card has a 15% APR and you owe $6,000. If you carry that balance for a year, you’ll ultimately pay $900 in interest alone. Alternatively, you could transfer that $6,000 to another card with a 0% interest rate. If you pay the balance off in a year on the no-interest card, it means you’ll end up saving up to $900 in interest.
5 Mistakes to avoid with balance transfer cards
Unfortunately, credit card companies don’t offer these too-good-to-be-true cards out of the goodness of their hearts. After all, these businesses are in the business of making money. If you’re not disciplined or misunderstand how balance transfers work, you could potentially end up in more debt than you started with.
Here are 5 mistakes to avoid when it comes to balance transfer credit cards.
Avoid overstaying your 0% APR welcome
People who take advantage of balance transfers sometimes forget that the 0% APR has a time limit. Around 12–18 months after you open the card, the zero-interest “good times” end. Then the interest rate skyrockets. Don’t be surprised if the sweet 0% APR suddenly jumps to a rate that’s even higher than the interest you were paying on your previous card.
Balance transfer cards are an effective tool only if you can pay off your entire balance within the 0% APR window. Carrying a balance on these cards once that window ends will just end up costing you more in interest.
Bottom line: Either transfer only the amount you think you can reasonably pay off during the 0% APR period, or find another balance transfer card to move the balance to before the 0% period ends.
Avoid overpaying on transfer fees
Keep in mind, most cards charge a fee to transfer your balance. Either they charge a flat fee or a percentage of your balance, whichever is higher. The percentage is usually between 3% and 5%, and it’s an up-front cost that’s charged when you complete the transfer. Before you transfer your balance to a new card, crunch the numbers to see if the transfer actually makes sense. If you’re carrying a small enough balance, it might not be worth paying the fee just to transfer your debt to a 0% APR card.
If you do decide to pay the upfront fee, make sure that you use the promotional rate for the entire length of time that it is offered to you. If you don’t, you are paying more than what meets the eye. Here's an extreme example: Say you do a balance transfer at 5% and then pay off the balance in one month. That means you effectively borrowed at a 60% APR.
That said, there are some credit card companies that will allow you to transfer your balance to a new or existing card for free. The chances of getting approved for these cards are quite good if you have a good credit score.
Speaking of credit scores, if yours is good, there may be an alternative to a balance transfer, particularly if the charge for making the transfer is too high. You might be able to renegotiate the interest rate with your current credit card issuer. Most credit card issuers want to hang on to their good customers and may be willing to lower your APR, waive your annual fee (if there is one on your card), or even increase your credit limit if you simply call them and ask.
Bottom line: Do your research and find the card with the lowest fees — or none at all.
Avoid late payments
Your payment history is one of the biggest factors affecting your credit score, accounting for up to 35% of it. One late payment on your record can lower your score by as much as 110 points. Late payments on balance transfer cards can be especially detrimental.
If you miss a payment on many of these cards, the 0% APR can suddenly vanish and the issuer might start charging you the regular double-digit APR. Basically, you lose the main benefit of the card and the reason you got it in the first place. Some issuers can even go as far as charging you interest retroactively from the time you opened the card. Therefore, make sure to never miss a payment on your balance transfer credit card.
Also, when making a balance transfer to an existing credit card, be careful as to when you make the transfer to avoid a late payment entry on your old card. Some balance transfers can take several weeks — which could make you late with the payment on your old card. Have the regular minimum payment on your card ready to submit in case there’s a delay in the transfer.
If your balance transfer goes through on time, however, it will count as aminimum payment on your old card, and you won’t have to worry about a late payment entry registering on your credit record.
Bottom line: Late payments can hit your credit score and wallet hard. Consider using a credit card management app like Tally† to make juggling multiple card payments easier.Tally lets you track all the important details of your cards (including the balance, APR, and due date) from one place, so you never have to worry about missing a payment.
Avoid using your old card
It can be tempting to use your old card for a purchase or two once you’ve transferred your balance from it. Try to avoid this at all costs. The reason for this is that you could end up racking up a new balance on your old card, leaving you exactly where you started. Now instead of chipping away at one balance, you’re stuck with two.
Banks actually hope you’ll use both cards. That’s why they offer this amazing perk with 0% APR cards.
Bottom line: Maximizing the benefits of balance transfer cards requires discipline and self-control. Focus on paying down debt, not making more of it.
Avoid closing your old card
Once you’ve carried out a balance transfer to a new or credit card, you might decide to close the old one since you are no longer using it, or simply because you want to avoid the temptation of using it. But that could prove to be a costly mistake.
Closing an old account can negatively impact your credit score. The average length of accounts is an important factor for your credit score. Closing an old card brings this average down, which could lead to a dip in your score.
Bottom line: Do nothing with your old card. Don’t use it. Don’t close it. Just leave it in a drawer somewhere.
If used properly, balance transfer cards are a great tool for paying off your credit card debt. Just make sure to avoid the common pitfalls we’ve listed here, and you’ll be on your way to being debt-free in no time.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.