Understanding Balance Transfer Cards: A Comprehensive Guide

At O1ne Mortgage, we prioritize consumer credit and finance education. Our goal is to provide you with the knowledge you need to make informed financial decisions. If you have any mortgage service needs, feel free to call us at 213-732-3074. In this blog, we will delve into the intricacies of balance transfer cards, their benefits, and potential downsides, and how to use them effectively.

What Is a Balance Transfer Card?

A balance transfer credit card allows you to move the balance of one or more credit cards to another, typically to take advantage of better terms and conditions. These cards are often used to consolidate credit card balances and save money on interest by leveraging a lower annual percentage rate (APR). Many balance transfer credit cards attract new customers with a temporary 0% intro APR offer. In some cases, this promotional interest rate includes both balance transfers and purchases, allowing you to carry both types of balances interest-free.

However, if you carry a purchase balance on a card that only offers the 0% APR on balance transfers, you may lose the benefit of the promotional rate. When you carry balances with different APRs—for example, a transfer balance at 0% and a purchase balance at the regular APR—your monthly payment may be split between balances. Card issuers typically apply any payments above the minimum payment to the balance with the highest APR, which would be the purchase balance in this scenario.

The Downsides of Using a Balance Transfer Card for Purchases

While it may be tempting to use your balance transfer card for purchases, especially to earn a welcome bonus or ongoing credit card rewards, there are several disadvantages to consider:

Interest on Purchases

Purchases made on a card with a transferred balance do not get a grace period from interest since you started the billing cycle with a balance. Interest will start accruing on purchases immediately, resulting in a finance charge even if you pay off your purchases balance. To completely avoid interest on purchases, you’ll need to pay your full balance, including the balance transfer, each month.

Difficulty in Paying Off the Balance Transfer

When you carry balances with different interest rates, card issuers can apply the minimum payment at their discretion. At most, only your minimum payment will be applied to the balance transfer. If you have a 0% APR balance and a purchases balance at the regular APR, the transfer balance will only decrease by a small amount each month.

Impact on Credit Score

Using more of your available credit for purchases raises your credit utilization ratio, which can cause your credit score to fall. This is an important factor to consider if you are planning to apply for additional credit in the near future.

The Best Ways to Use a Balance Transfer Card

When used correctly, a balance transfer card can be a smart way to pay off high-interest rate balances. Here are some tips to maximize the benefits of a balance transfer card:

Understand the Terms and Conditions

Terms vary between credit cards, so pay close attention to the length of the introductory period and the ongoing APR after the promotional rate expires. Understand whether the 0% APR also applies to purchases.

Review the Balance Transfer Fee

Your fee will likely be a percentage of the amount transferred, which means balance transfer fees can get expensive. Before completing the transfer, make sure it’s worth it by comparing the fee to the amount of interest you’d pay based on your current APR and monthly payment.

Have a Repayment Plan

Paying off the transfer balance by the end of the promotional period gives you the maximum interest savings. You can calculate your minimum monthly payment by summing the balance and the transfer fee, then dividing that amount by the length of the introductory period.

Avoid New Purchases

Mixing balances with different interest rates on your balance transfer card complicates the repayment process. Even purchases on your other credit cards reduce the amount you can afford to pay toward the balance transfer.

The Bottom Line

Though it’s technically possible to make purchases on a balance transfer card, it’s not the best move if the promotional APR only applies to balance transfers. At O1ne Mortgage, we can help you quickly compare different balance transfer offers to find a credit card that offers a 0% intro APR on both balance transfers and purchases. Your credit score plays a role in getting approved for the best balance transfer credit cards. Getting your free credit report and score can help you estimate which credit cards you’ll likely be approved for.

If you have any questions or need assistance with mortgage services, don’t hesitate to call us at 213-732-3074. We’re here to help you make the best financial decisions for your future.