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When to consider a balance transfer

Thinking about a credit card balance transfer? Check out how a balance transfer can help your finances.

When to consider a balance transfer

If your monthly credit card statement gives you the sinking feeling that you'll be digging out of debt forever, take heart as you do have options. One of those options is a balance transfer.

What is a balance transfer?

Balance transfers are just as they sound. You move the amount of money you owe on one credit card to a different credit card, hopefully with a lower interest rate.

The credit card you transfer your balance to can be one you already have, assuming it has enough available credit, or it can be a new credit card.

Two reasons to consider a balance transfer are:

  • It may help you pay off your balance faster.
  • It may help you pay less interest.

Suppose you have a $5,000 credit card balance with an interest rate of 15.4%, and a minimum payment of 2% of the balance (plus accrued finance charges within the month) with a $25 minimum. If you only made the minimum monthly payment, at that rate it would take you 23 years to pay off your balance. Over the years, you'd have shelled out $7,605, in total interest.

Graphic for scenario 1 mentioned in text above.

But what if you transferred that balance to a credit card with a lower interest rate? Even if you continued making the minimum payment, you'd be better off.

With a 10.4% interest rate and everything else staying the same, you'd pay off your balance in 15 years and 11 months, and only pay $3,402 in interest — significantly less. This calculation even includes a balance transfer fee of 3% of the balance or in this case, $150. Make sure to check your balance transfer fee as it could be higher or lower than the hypothetical 3% used in this illustration.

Graphic for scenario 2 mentioned in text above.

To maximize the value of a balance transfer, consider a one-two punch approach. In other words, transfer your balance to a lower-rate credit card and at the same time, increase your monthly payment as much as you can. Every little bit adds up.

Following that same example in Scenario 2, if you were to increase your monthly payment from the minimum payment to $100, you could pay off your balance in 5 years and 9 months — paying only $1,701 in total interest. This shows the value of a lower interest rate and increasing your debt repayment amount.

Graphic for scenario three mentioned in text above.

Interest rates and balance transfer fees are for illustrative purposes only. They don't necessarily represent existing or available rates and fees. These scenarios do not consider any additional charges put on the credit card following the balance transfer.

Is a balance transfer right for you?

Before you rush into a balance transfer, self-reflect on what spending habits may need to change so you can make a balance transfer work in your favor and not accrue additional debt. If you share finances with someone else, maybe a partner or spouse, you may want to discuss it with them. Talk about what you hope to achieve through a balance transfer — both in the short and long term.

If you tend to carry a balance from month to month, take note of whether that balance has been growing — a sign that you're likely spending more than you're earning.

Be sure you have a strategy for your old credit card. Will you cancel it or will you put it away to avoid adding more debt? Because opening and closing credit cards may affect your credit score, it's important to understand the potential impacts before closing any accounts.

Most importantly, resist charging up the balance of your old credit card again, no matter how tempting it may be. You don't want to be in a situation where you transfer your balance to the new credit card to save money on interest, but then rack up new debt on the old credit card.

Read the fine print.

There are fees, along with terms and conditions involved in most balance transfers.

Companies may charge a fee which is typically a percentage of the transfer balance. The fee needs to be taken into consideration to ensure it's not more than offset by any interest savings.

Also, be careful not to transfer your balance to a credit card with a higher interest rate. That may sound obvious, but sometimes credit card companies will advertise a low rate that's only temporary. Before you complete a balance transfer, find out if the rate is promotional — and if it is, how long it will last and what the rate will be after the promotion ends. The interest-free or low-rate introductory period may only last 12 to 18 months or less. It's important to know that up front.

If both a balance transfer and additional purchases are made and are subject to different interest rates, you'll want to ensure you understand how your payments are being applied. It's also important to note that balance transfers typically don't earn rewards like other charges on the credit card may.

If you have a plan and adopt a disciplined approach to paying off your debt, a period with a low promotional rate can help buy you time to chip away at your debt without building up so much interest. But ideally, you'll want to pay off your balance during the promotional period.

If that's not possible, make sure you'll be able to manage that payment once the promotional period expires.

Relying on the expectation that you can continually transfer balances to the next promotional offering may not be realistic and could cost you more in the long run if the rate increases significantly.

Finally, remember to stay focused on the end goal. You may feel a bit of relief once the transfer is done, especially if you're incurring lower finance charges for a while.

Don't let up on the gas on any debt paydown strategies you might be pursuing. Instead, focus on how good it will feel to have your debt balances smaller in the future.

Find tips for managing your credit.

Whether or not you decide a balance transfer is right for you, consider these steps to better manage your credit:

  • Create a budget. Then before you make your next purchase — whether it's a gift, piece of furniture or cup of coffee — be sure it's accounted for.
  • Review all your credit card statements. Highlight the current balances and decide on a plan for paying them off. You can either start with your highest interest rate debts or smallest balances.
  • Build up your emergency fund. The goal is to have three to six months' worth of living expenses on hand. However, that might seem like a huge goal while you're also considering paying down debt. Save to have an emergency fund of $1,000. Then work toward reducing debt while you slowly build to a fully funded emergency fund. This way, if an unexpected expense comes up, you don't have to rely on your credit card.
  • Enlist the help of a financial counselor, friend or family member to help hold you accountable and provide support.

The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.