Latest data from Experian shows that more than half of Americans carry credit card debt.
If you are one of the many already struggling to pay yours off — or you anticipate being unable to after the sweeping financial unrest of coronavirus — a balance transfer credit card can give you a little flexibility and save you generously on interest.
Sound too good to be true? Below, CNBC Select spoke to credit expert Beverly Anderson, president of global consumer solutions at Equifax, about why people do a balance transfer and how completing a balance transfer can affect your credit score.
Why do a balance transfer?
The biggest benefit of a balance transfer is the temporary no-interest period. With a balance transfer card, all your monthly payments go toward your principal balance during the promotional interest-free period, whereas your current payments might be getting almost halfway eaten up with interest charges.
But there is a second benefit that most don't always consider, and that's organization.
"People consider doing balance transfers as a way to stay organized, consolidate debt and keep your credit in one place," Anderson tells CNBC Select.
Regardless of the APR on the new balance transfer card, the key is to take advantage of its interest-free period so you don't ever have to pay interest on your debt. Plan your monthly payments so that you pay off the entire balance within that balance transfer card's 0% APR time frame.
What are some of the best balance transfer cards?
CNBC Select's picks for the top balance transfer cards can be found here, but we rounded up a few below.
The Citi Simplicity® Card with a 0% APR for the first 21 months on balance transfers (then 14.74% to 24.74% variable APR) offers one of the longest stretches of interest-free time to pay off your debt.
And the Discover it® Balance Transfer comes with 0% APR for the first 18 months on balance transfers (then 13.49% to 24.49% variable APR).
While most balance transfer cards usually require a 2% to 5% fee (or a $5 minimum) for each transfer, there are some balance transfer cards with no fee. The Amex EveryDay® Credit Card has a shorter timeline at 0% APR for the first 15 months on balance transfers (then 12.99% to 23.99% variable APR), but it has no fee on balance transfers.
To qualify for the longer interest-free periods, you will most likely need to have good or excellent credit, but there are options available for fair credit as well.
Your credit score will also determine the amount of debt you can transfer (either a percentage of your total credit limit or a set dollar amount). For example, terms for the Chase Slate® Credit Card state: "The total amount of your request(s) including fees and interest charges cannot exceed your available credit or $15,000, whichever is lower." So, if you have a $6,000 credit limit, the maximum amount you can transfer is $6,000.
How does a balance transfer affect my credit score?
Like with any other credit card, making on-time payments is just as important with a balance transfer card. Your payment history counts as 35% of your credit score calculation, but hopefully with a balance transfer card it will be easier to pay on time since you aren't racking up additional interest during that card's specific 0% APR period. If you miss a payment, you may also risk losing out on the card's 0% introductory offer.
Also, don't forget that applying for a new credit card — even a balance transfer card — triggers a hard inquiry on your credit report.
"Hard inquiries serve as a timeline of when you have applied for new credit and may stay on your credit report for two years, although they typically only affect your credit scores for one year," Anderson says. "This may lower your credit scores by a few points."
But a balance transfer might impact your credit score favorably when it comes to your credit-to-debt ratio, or credit utilization rate. By opening a new card, you'll be increasing your total credit limit. In this case, you'll want to remain vigilant about not racking up debt on your old card once your old balance returns to $0. If you can do this, you could see a positive uptick in your score since you'll have more unutilized credit available than you did before.
What to do to get the most out of your balance transfer
In addition to understanding the terms of your balance transfer and assessing any balance transfer fees that will be applied, the best way to make your balance transfer worthwhile is to pay off your balance before the introductory period ends (which begins as soon as you open the card). And experts agree.
"To get the most out of your balance transfer, you should always pay at least the minimum payment on time, stay within your credit limit and aim to pay off your balance before the offer runs out," Anderson says.
When avoiding credit card debt altogether doesn't work, it may be time to transfer your balance.
Information about the Amex EveryDay® Credit Card and Chase Slate® Credit Card has been collected independently by CNBC and has not been reviewed or provided by the issuer of the card prior to publication.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the CNBC Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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