Most folks have a decent understanding of credit card balance transfers. If you don’t, read my primer for more info.
Simply put, they allow you to move outstanding credit card balances from one credit card to another to save money.
This is accomplished by moving the debt from a high-APR credit card to a 0% APR credit card or similarly low-APR card.
Once the debt is moved, less interest is due each month thanks to the lower interest rate, which allows more of each payment to pay down the principal balance.
This in turn allows you to get out of the debt cycle and avoid piling up debt in the future.
Balance Transfers Only Last for a Limited Time
- Balance transfers offer a promotional zero- or low-APR period
- It typically lasts 12 to 15 months or even longer
- The full balance isn’t due once this period ends
- But your interest rate will rise at that time, so it’s best to pay off as much as you can
Personally, I feel balance transfers are a great tool to manage debt and save money, but they also come with lots of gotchas.
One of those is the fact that the balance transfer APR is only offered for a limited time.
So you may find that you can move your credit card balance to a new 0% APR card for 12 months.
But what happens once those 12 months end, when the “balance transfer offer expires?” Do you owe the entire balance in full, like a loan?
Nope. That’s the good news – you aren’t on the hook for the full balance once the promotional period ends.
Now the semi-bad news. Once the 0% APR period ends, or whatever the introductory rate, your APR will typically revert to the standard purchase APR.
Unfortunately, this APR is typically sky-high, with rates in the teens or twenties not at all uncommon.
In other words, if you don’t pay off the transferred debt by the time the intro period ends, you’re effectively back to square one.
Sure, you may have paid off some of the debt during that 12-month period, but you certainly won’t want to be subject to excessively high APRs again.
And let’s not forget the balance transfer fee you might of paid along the way.
Make It a Goal to Pay Off Your Balance Before the Promo APR Ends
- It might be wise to make monthly payments that pay off the full balance
- Determine what you owe and what you need to pay monthly to accomplish this
- It’s not a necessity, but it’s the best way to save the most money
- If you can’t do it, it could make sense to execute another balance transfer to extend your promotional APR
To avoid this all-too-common scenario, it might be best to set up a repayment plan where the full amount of the debt (including balance transfer fee) is paid off by the time the promotional period ends.
For example, if your balance transfer offer gives you 0% APR for 15 months with a 3% balance transfer fee, try to pay monthly installments that extinguish the debt by then.
Balance transfer amount: $3,000
Balance transfer fee: 3% ($90)
Promotional APR: 0%
Promotional APR period: 15 months
Let’s assume you find a card that offers 0% APR for 15 months with a 3% fee. You transfer $3,000, and now owe $3,090.
In order to pay the entire balance off before the APR jumps up to whatever the purchase rate is, you’ll need to get down to zero in 15 months.
To do so, simply make monthly payments of $206 and you’ll be good to go. You won’t have to worry about what happens beyond that.
After 15 months, you’ll have a credit card with a zero balance, which should boost your credit scores.
In fact, you should have at least two credit cards with zero balances, including the old card you transferred the debt from.
From that point on, you can use the balance transfer credit card as your everyday credit card, assuming it offers some sort of value like cash back (or points) rewards without an annual fee.
Or you can just stuff it in a drawer and forget about it. The choice is yours.
Conversely, if you still owe debt on the card, you’ll need to figure out a new game plan.
That may involve transferring the debt again, or attempting to pay off the balance ASAP to avoid the pricey finance charges.
Regardless, don’t fret too much. You aren’t obligated to pay off your balance transfer by any specific date.
In fact, the credit card companies are banking on you not to, because it makes them more money.