One credit card opening can improve your finances

Opening a new credit card account is usually not a good idea unless your finances are in good shape. However, there is one type of credit card that can help you get one from debts if you use it correctly.

With a good balance transfer card, you can move your credit card balance and enjoy a low introductory rate, often 0%, which can help you pay off your balance without interest. Here’s how to do it and what you need to know before choosing a card.

How a balance transfer card can improve your finances

Balance transfer cards are credit cards that offer low introductory rates for a set period of time, usually 12 to 21 months. Most charge a transfer fee of 3% to 5% of the amount you transfer to the new card. While the fee will add to your balance, it can benefit you in the long run because you’ll be making payments with little or no interest.

For example, the average American household with credit card debt has a balance of $6,065 and an average annual interest rate of about 23.4%. Let’s compare two scenarios: one with a starting balance and a high rate vs. a carried balance and a low introductory rate.

If we transfer $6,065 to a 0% introductory balance transfer card, we may pay a 3% transfer fee of approximately $362, leaving a new balance of $6,427. Here’s how these two scenarios could play out:

Data source: Author’s calculations

If you open a balance transfer card in this scenario, you’ll pay $362 in fees but avoid $1,637 in interest payments. saving $1,275! You will also pay off the balance five months early. This can go a long way in easing the burden of paying off your balance.

We’ve reviewed the best balance transfer cards for you. Click here to see which ones topped our list.

How to determine if a balance transfer card is right for you

Balance transfer cards aren’t right for everyone, so consider these factors before applying.

1. Weigh the fee

First, as mentioned above, you will likely have to pay a transfer fee to move your balance. Most commissions will be between 3% and 5%. This means that a $5,000 balance with a 5% transfer fee would be $5,250. Calculate beforehand to make sure the new balance suits you. Also, most of these cards won’t charge you an annual fee, but you should check first to make sure.

2. Check the rewards

Some balance transfer cards come with rewards like cash back on purchases. If you see several cards with similar terms, but one has generous cash rewards, it might be worth choosing that over a card that doesn’t offer any. Eventually, you may want to use the card to make purchases when you pay off your existing balance, so choose a card that suits your needs.

Not all rewards cards are created equal. Click here to view the top rated cash back rewards cards.

3. Consider the rate

While many balance transfer cards have a 0% introductory APR, not all do. And even if you get an introductory 0% APR, you should also consider the transfer rate after the introductory period is over. Ideally, your balance will be paid off by this time, but it’s a good idea to see how high the APR might be after the original rate expires.

The most important thing to remember with balance transfer cards is that you should not make any new purchases on the card. To get the most out of your card, don’t overcharge it when paying off the balance. This will help you pay off the balance faster and ideally eliminate the debt before the annual interest rate starts to increase.