A balance transfer is when you transfer the outstanding balance from one credit card to another credit card.
0% balance transfers are very popular promotional offers that credit card companies use to entice new cardholders. The promotional period will vary with 12 months being the most common, but you won't be assessed any interest on your balance for that promotional period. Once that period ends, interest will accrue at the regular interest rate.
Why a balance transfer might make sense:
- You can use it to consolidate multiple debts. When you get a balance transfer, the credit card company can send different amounts to different cards. This could mean consolidating the debts on multiple cards into one, which makes it easier to manage.
- It buys you breathing room. With the promotional period setting you up with a 0% rate, you now have more time to pay down the principal of your debt without the added drag of interest. It doesn't solve the underlying debt issue, it makes it easier to service.
- You may be able to transfer non-credit-card balances. This varies from card to card also but if available, can consolidate your debts and lower their interest for a short time.
What to watch for in balance transfers:
- Double check the regular “ongoing APR” rate. It may be much higher than the interest rate of your current debt, negating the benefits of 0% unless you are able to pay it off during the promotional period.
- Watch the fees. There is almost always a balance transfer fee, capped at some percentage with a minimum dollar amount. It's pretty common for there to be a 3% fee that must be paid immediately.
- Don't miss a payment. If you do, you may lose the 0% promotional rate!
- Check if purchases are interest free too. Some cards are 0% on balance transfers and purchases, some are just on balance transfers. If you don't have it on purchases, using the card can be very expensive because interest accrues immediately.
- Avoid cards with an annual fee. It's just another fee that'll make the debt payment harder.
- Transfers do NOT count towards purchase bonuses. If you signed up for a credit card because it offered a promotional bonus, transfers do not count as purchases.
Remember, a balance transfer is little more than kicking the can down the road. You have to pay off your debt or you've done nothing except delay the inevitable.