Avoid These 7 Costly Balance Transfer Mistakes

Experian estimates that U.S. consumers are transferring $35 to $40 billion in balances from one creditor to another annually — and for good reason. Transferring balances from high APR credit cards and loans to a new credit card with a long introductory period at 0% APR can be a smart strategy for saving thousands on interest and paying off credit card debt more quickly.

However, there are some common pitfalls to watch out for if you’re considering transferring any of your balances to a 0% intro APR credit card. Here is a closer look at some of the most frequent balance transfer mistakes consumers make — and how you can avoid them.

First, understand the basics of doing a balance transfer

Before we get into the mistakes, let's make sure we're on the same page when it comes to what a balance transfer is all about. The strategy behind balance transfers is pretty simple:

1. You open a new credit card account that offers a long period of 0% intro annual percentage rate (APR) on balance transfers, usually between 12 and 18 months.
2. Based on the limit the new credit card issuer gives you, as well as what fees you’ll be charged for transferring balances, you can decide which of your high interest debts you want to transfer to the new card.
3. Once you decide which debts to move, you work with the card issuer to make this happen. When this is done, you’ll have $0 balances on your old high interest debt(s) and a new interest-free balance on the new card.
4. Now you can focus on making payments on this new balance with the goal of paying it off before the end of the 0% intro APR period. This is where your savings add up since every payment you make reduces the balance instead of most of it going to pay interest.

A balance transfer strategy is a good idea if you have good-to-excellent credit (needed to qualify for most 0% intro APR cards) and one or more debts with high interest rates that you are looking to pay off faster and with less interest. These debts can include credit card balances, personal loans, medical bills, home equity loans, payday, and title loans, or even business loans.

There are a lot of credit cards on the market today that you can use for balance transfers, and you’ll want to do your homework to make sure you understand what you’re getting into before making any decisions. Because as easy as a balance transfer is, it’s also easy to make some costly mistakes while doing it.

Here are some of the most common balance transfer mistakes — and how you can easily avoid them.

Not taking the time to find the best card

The name of the game is “Which card has the best deal?” when shopping for the best balance transfer cards. Lenders are very competitive when it comes to attracting new cardholders with balances they want to transfer. Just because you can be approved for a card doesn’t mean it’s right for you, though.

Generally speaking, you want to take the time to research what cards are out there, which ones have the longest intro periods at 0% APR, and which have any additional perks you could benefit from.

Once you find a few you think will meet your needs, take a deeper look at the terms and conditions to make sure you understand:

• How much in fees the credit card issuer will charge to transfer your balance
• How long you have to pay off the balance
• How repayments are allocated to the transferred balance if you make additional purchases (Hint: most of the time, they’re not)
• What your APR rate will be after the introductory period
• Whether there are any penalties for late payments or annual fees

For example, the Citi Simplicity^® Card is a good credit card to consider. It gives you 21 months at 0% intro APR (then 18.99% - 29.74% (Variable)) on balance transfers, and it has a $0 annual fee, no late fees, and no penalty APR. It does have a balance transfer fee at 3% of each balance transfer ($5 minimum) within 4 months of account opening; then 5% of each transfer ($5 minimum) after the 4 month intro period ends, but that may be worth paying depending on how much you transfer.

Learn more in our Citi Simplicity^® Card review.

Trying to transfer a balance with the same credit card issuer

Most credit card issuers won’t allow you to transfer a balance from another card they offer or service.

For example, say you have a credit card with Wells Fargo that has an 18% APR, and you can submit an application to get a Wells Fargo Active Cash^® Card with 0% intro APR for 15 months from account opening on qualifying balance transfers (then 19.99%, 24.99%, or 29.99% variable APR). If you’re approved, you won’t be able to transfer the balance from your existing card to the new one.

Learn more in our Wells Fargo Active Cash^® Card review.

The worst-case scenario here is that your credit score will take a hit for having had a hard inquiry performed for processing the application, and you still won’t be able to do a balance transfer.

The dip in your score will only be an issue for a few months, but the hard inquiry will stay on your report for around two years. And if you can’t complete the transfer you wanted to make, then you’re still stuck with high interest debt.

To avoid this, make a list of debts you want to pay off with a balance transfer card. Then do some research to see what that debt holder’s policies are for transferring debt from one product to a new 0% intro APR card. Simpler yet, make sure you are transferring debt from one financial institution to a different financial institution.

Not making your balance transfer deadline

Many cards only give you a few months to make your balance transfers and have the 0% intro APR apply. If you transfer balances after that, the regular APR will apply, possibly at a higher APR than you were paying on your original debt and now with balance transfer fees added.

Take the Citi^® Double Cash Card, for instance. You can get 0% intro APR, and that will last for 18 months — but only on transfers made in the first four months from opening the account. After that, the APR of 18.99% - 28.99% (Variable) will apply to what you transfer. So it’s important you request your balance transfer in a timely manner.

Find out more in our Citi Double Cash Card review.

Make sure when you read up on a card or speak to a customer service representative about terms and conditions that you look to see if there is a specific time frame you have to execute your transfers. Then once you get a card, make a plan for completing those transactions quickly, so you don’t miss out on the interest savings.

Not making your payments on time

If your balance transfer card has a penalty APR that kicks in when you make late payments, you could risk going from 0% intro APR to a much higher percentage if you skip a month or two.

A penalty APR is a significant increase in your regular APR that is imposed by the card issuer if you violate any of the terms of your agreement, including making late payments.

Some credit cards have a penalty APR, some don’t. Some will apply it only after 60 days of non-payment, others after one day. And all of your balances can be subject to penalty APR.

To avoid this situation, carefully read the terms and conditions of a balance transfer credit card before applying, specifically looking for information about a penalty APR. If you have questions, call the card issuer’s customer service.

If you do end up with a card that may impose this penalty, you can ensure you won’t miss payments by programming due dates and reminders into your digital calendars or setting up autopay with your bank or credit card issuer.

Running up the balance on your new credit card

There are two main reasons you want to avoid making new charges on a card you transfer balances to.

• First reason: Although many of these cards also offer 0% intro APR on purchases for a certain number of months, adding to your balance adds to your overall credit utilization ratio. This ratio is basically a measure of how much of your available credit line you are currently using. Since this ratio has a significant impact on your credit score, you want to keep it as low as you can.
• Second reason: You may be charged an annual percentage rate on new transactions, and your monthly credit card payments may or may not be allocated the way you want them to be. Most credit cards don’t give you the option to specify what gets paid first (balance transfer versus new purchases), or they apply a blanket policy, such as “payments are applied to the balances with the lowest interest rate.” That means your payment could be going toward your 0% intro APR balance transfer and not toward new purchases that are costing you more.

The easiest way to avoid this problem is to not use your balance transfer card for anything other than paying down that debt.

Closing your old card

Once you pay off a credit card using a balance transfer, don’t close out the account that now has a $0 balance. Keep it open so that it remains on your credit report. There are a couple of reasons for this:

• Closing accounts can create a negative impact on your score by reducing both the average age of your credit and the amount of available credit you have.
• When you leave a card open and don’t use a credit card for a while, the credit card company may sometimes increase your credit limit and, therefore, the amount of available credit, which improves your credit utilization ratio. They may also send you a 0% intro APR balance transfer offer because they want to entice you to put some money back on the card.

Overall, keeping the account open and unused can only help your credit score.

Not having a debt reduction plan

The moment you make your first balance transfer, the clock is ticking on how long you have to pay off the balance without paying interest. And getting out of debt is the whole reason you got the card, to begin with, right? So make sure you have a debt reduction plan. Here’s a simple way to create one.

1. Divide your total amount of money owed by the number of months in the introductory period. This gives you how much you’ll have to pay monthly to have a $0 balance by the time the regular APR kicks in. (Example: $3,750 in debt / 15 months of 0% intro APR = $250 monthly payments)
2. Use that number to build a budget so you can always pay that amount or more if you want to pay off your debt even sooner.

Following these two simple steps, you’ll be sure to avoid paying any interest and significantly reduce your debt.

Bottom line

When you’re considering enacting a balance transfer strategy to reduce your debt and avoid paying large amounts of interest, make sure to do your homework before applying for a card and also come up with a plan for paying off your debt.

Along the way, be sure you understand the timeframes, terms, and conditions of your new balance transfer credit card, make timely payments, keep accounts you’ve paid off open for the benefit of your credit score, and avoid adding new purchases to your card.

There are lots of cards out there that are designed for balance transfers, so use that as a starting place for your research. You can also check out the cards we talked about in this article:

• Citi Simplicity^® Card
• Citi^® Double Cash Card
• Wells Fargo Active Cash Card

Congratulations on your decision to save big on interest charges while paying off your debt. Now you’re on your way to seeing your balances go down and your credit scores go up.