How to Use a Balance Transfer Credit Card: The Dos and Don'ts

If you’re carrying a balance on multiple, high-interest credit cards, you might consider a balance transfer credit card to help you simplify debt repayment and save money from lower interest costs. While there are benefits to using a balance transfer credit card, there are also important risks to consider. 

Here’s everything you need to know about the dos and don'ts of using a balance transfer credit card, so you can decide if it’s right for you. 

What is a Balance Transfer Credit Card? 

A balance transfer is when you transfer a credit card balance (or a few) to another card. With a balance transfer credit card, you can consolidate multiple high-interest debts onto one card, typically with a lower or even a 0% promotional interest rate.

If you have a lot of high-interest debt spread across multiple credit cards, you might consider a balance transfer credit card. 

Understanding Balance Transfer Credit Cards

If you can qualify for a balance transfer card with a lower rate than your current debts, there’s potential to save money by reducing your interest costs. Ideally, you want to find a balance transfer credit card with a 0% interest rate and a long promotional period. If you can pay off all, or most, of your debt during the promotional period, this can lead to considerable savings.

Consolidating multiple debts onto one credit card can also simplify the debt repayment process. Instead of juggling several payment deadlines, interest rates, terms and fees, you only have to focus on one.  

Before applying for a balance transfer credit card, make sure you understand the length of the promotional period and the interest rate after the promo ends. You’ll also want to calculate the balance transfer fee, which is the charge associated with moving your debt from one card to another. It’s typically a percentage of the amount that you transfer. For example, if you want to transfer a balance of $3,000 with a 2% transfer fee, it will cost you $60. 

Tips on Using a Balance Transfer Credit Card: The Dos

Like any financial product, there are benefits and risks associated with a balance transfer credit card. Here are some things you should do when shopping for, and using, a balance transfer card. 

• Compare offers carefully: Before selecting a balance transfer credit card, carefully compare different cards on criteria including the promotional rate, length of promotional period, balance transfer and annual fees. Ideally, you’ll want a balance transfer credit card that offers you a 0% introductory APR for the longest possible duration. 

• Make a plan to pay off your debt: Before applying for a balance transfer credit card, create a realistic payment plan so you can ensure you pay off the balance during the promotional period. If you find yourself unable to pay off the balance during the promotional period, you can start by looking at other balance transfer credit cards that might be a better option for your needs. You may also want to consider talking to a credit counsellor to help you make the right decision.  

• Understand the terms and conditions: Read the fine print and ask questions if you’re unsure about any details. Make sure you know your credit limit and what the interest rate will be once the promotional period ends. 

• Use the card to consolidate debt: A balance transfer credit card can help you simplify debt repayment by transferring multiple high-interest debts onto one card. Once you do this, the goal is to avoid using the card for new purchases so you can pay off as much debt as possible during the promotional period. 

• Maintain good credit habits: Always make your payments on time, and try to keep your credit utilization ratio low - i.e. use 30% of less of your total credit limit. Your payment history and credit utilization together account for the largest portions of your credit score of about 65%.  

Mistakes to Avoid With a Balance Transfer Credit Card: The Don'ts

If you decide you want to use a balance transfer credit card to try and save on interest payments, make sure you avoid the following mistakes:  

• Don’t transfer more than you’re able to pay:  While you might have high expectations for how much debt you can pay during the promo period, try to be realistic. Avoid maxing out the card, because you’ll get stuck paying a higher interest rate on the balance when the promo period ends. A balance transfer card makes sense for you if you’re able to pay off most or all of your debt during the promo period, particularly your high-interest debt. Make sure that you’re able to handle the card’s annual percentage rates (APR) that will kick in when the promo period is over. 

• Don’t ignore fees: Balance transfer fees can add up. Before you decide if a balance transfer card is right for you, calculate the cost of transfer fees and compare it to potential savings. Let’s take an example where you have a balance of $5,000 with an annual percentage rate of 19.99%. The balance transfer card you are interested in, the MBNA True Line Mastercard, offers a 0% promotional annual interest rate (AIR) for 12 months on balance transfers, with a 3% balance transfer fee. Your total current interest is $974.76, but if you transferred your balance to the MBNA True Line Mastercard during the promotional period, that would go down to $150.00 (= the 3% transfer fee). This means that by transferring your balance, you could save $824.96 on interest payments in a year. Many lenders provide handy balance transfer calculators that you can use. 

• Don’t miss payments: Missing a payment can result in the loss of your promo rate. This defeats the purpose of using a balance transfer credit card. Missing payments can also damage your credit score. 

• Don’t close old credit accounts immediately: Closing accounts can hurt your credit score by reducing your available credit, which can increase your credit utilization ratio. It can also shorten your credit history. Even if you aren’t using the credit card, you might want to keep it open to maintain your credit history. 

• Don’t use the balance transfer card for new purchases: The purpose of a balance transfer card is to help you pay off existing debt, not make new purchases. While some balance transfer cards offer promo rates on purchases, some don’t. You may end up paying a high rate on purchases which can lead you to go deeper into debt.

The Bottom Line

Responsible usage of a balance transfer credit card can help to simplify debt repayment and lower interest charges. To maximize the benefits of a balance transfer card, make sure you understand the terms and conditions of your agreement and have a solid debt repayment plan in place. Then, focus on making your payments on time. To avoid taking on additional debt or damaging your credit score, don’t transfer more than you can realistically pay off during the promo period, and avoid making new purchases. As with any product, you’ll want to shop around to ensure that you select the right balance transfer credit card for your needs. 

Now that you understand how balance transfers work, you can decide if a balance transfer credit card is right for you.