When to consider a balance transfer

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 to $100, you could instead pay off your balance in 5 years and 9 months, paying only $1,707 in total interest. This shows the value of a lower interest rate and increasing your debt repayment amount.

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, 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. This could be 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. Take the fee into consideration to ensure it doesn’t negate 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. You will also want to understand whether interest will immediately begin to accrue on your purchases until you pay your balance in full (including any transferred balances), or whether you will have a grace period on your purchases. It's 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 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 or as you incur multiple balance transfer fees.

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. Before making your next purchase, whether it's a gift, piece of furniture, or a 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, preferably in a savings account. 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 help. Speak to a financial counselor, friend, or a family member to help hold you accountable and provide support.