If you qualify for or already have a credit card with a low introductory APR offer on balance transfers, it could make paying off debt simpler and more convenient.
Read on to find out how to calculate balance transfer savings and decide whether a balance transfer is worth it.
What Is a Balance Transfer?
A balance transfer is a way to consolidate debt. It allows you to move your outstanding balance or balances from one credit card to another.
Many card issuers offer cards with low introductory APR on balance transfers. The low introductory rate for a card lasts for a set period. After this period ends, your interest rate typically rises to the standard variable APR on balance transfers for the card. If you have an outstanding balance, it will begin accruing interest at the new rate.
When Does a Balance Transfer Make Sense?
If you qualify for (or already have) a balance transfer card with a low introductory APR and think you can pay off all your debt before the intro period ends, this can mean you’ll pay less in interest overall.
What if you can’t pay everything off? A balance transfer may also make sense if you think you can pay off most of your balance before the promotional period is over. Do the math and make sure the amount you’ll end up paying in interest won’t undo the progress you made.
Does a Balance Transfer Impact Your Credit?
While a balance transfer won’t necessarily affect your credit, some of the actions surrounding it can.
Opening a new credit card:
Applying for a new credit card typically triggers a hard credit inquiry, which can cause your credit score to dip by a few points temporarily.
However, opening a new credit card can also give you more access to available credit and decrease your credit utilization ratio (the amount of total available credit you’re using). Lowering your credit utilization ratio can positively affect your creditworthiness.
Paying down your outstanding balance:
If you use a balance transfer as an opportunity to quickly tackle debt, this can reduce your credit utilization ratio and improve your credit.
Transferring a balance to an existing card:
If you transfer a balance from one card to an existing card, it will likely not affect your credit. You’re not opening a new card, and your credit utilization is unchanged.
Balance Transfer Fees
Most card issuers charge a balance transfer fee for each balance transferred.
Balance transfer fees are usually a percentage of the balance transferred or a flat fee, whichever is higher.
Calculating Balance Transfer Fees
Calculating a balance transfer fee is relatively simple.
For each balance you transfer, multiply the total balance by the percentage your new card charges for balance transfers. If the percentage amount is higher than the flat fee the card charges for balance transfers, the percentage amount applies. If the percentage amount is lower than the flat fee, the flat fee applies. You can find the information on balance transfers in the terms for your card.
For example, if you’re transferring $1,000 and the fee is 5% or $5 (whichever is higher), the balance transfer fee is $50.
Calculating Balance Transfer Savings
To get an idea of how much you could save with a balance transfer, consider what kind of a monthly payment you can commit to. Using that amount, calculate the total amount you would pay with a balance transfer card (including interest and any balance transfer fees) by the time you pay the entire balance off. Compare that to what you would pay if, with the same total monthly payment, you continued paying your existing balances (including any interest and fees) without a balance transfer until everything is paid off.
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Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.