How to tell if a balance transfer will pay off

Q. “Are balance transfers a good option?”

A. If you’re struggling to pay down credit card debt, transferring that balance to another card with a lower interest rate can be one way to reduce interest charges and pay the debt off more quickly.

But before transferring the cash or applying for a new credit card, you should factor in balance transfer fees, compare interest rates and think about how the move would interfere with other financial goals.

Here’s how it works. Typically, consumers pay a fee to transfer a balance from one card with a higher interest rate to one with a lower rate. Often, the lower rate only applies for a limited amount of time, usually ranging for six months to 18 months. After that promotional period is over, the balance may be subject to a higher rate.

One of the first things to factor in is the transfer fee, which is usually a percentage of the balance transferred, say 3 percent or 5 percent, with a minimum of about $5. Before agreeing to the transfer, you should calculate how long it might take you to pay off the balance. Your credit card company or sites like CreditCards.com and Bankrate.com may offer an online calculator that can help you figure out how much you can save through a balance transfer.

Some people who think they will pay their cards off in a few months may be better off not doing a balance transfer if the interest they would pay on their current cards is less than, or about equal to, the amount of the balance transfer fee.

But others with larger debt loads may be able to pay their balances off more easily if they transfer it to a zero percent card, since all of their payments would go directly toward the principal, says Jocelyn Baird, associate editor for NextAdvisor, a website that reviews consumer services.

Another thing to factor in is the interest rate that you would be subject to after the promotional period is over, says Sean Stein Smith, a member of the Financial Literacy Commission for the American Institute of CPAs. If that rate is much higher than the rate you are paying now — and you don’t make significant progress with paying down the debt during the promotional period — you may not save as much in interest charges as you expect, Smith says.

Finally, you should think about how the balance transfer may affect your credit score. Opening a new credit card to receive the promotional interest rate can increase the amount of credit you have available and lower your credit utilization rate, or the share of total credit that you are using. Because utilization is the second most important factor that goes into your FICO score, it could boost your credit score in the long run, especially if the transfer helps you bring down your debt load even further.

However, applying for a new credit card can also ding your score in the short run, Smith says. Applying for a credit card, or any loan, requires a hard inquiry of your credit report and can lower your score by a few points temporarily. So if you are preparing to apply for a major loan in the next several months, such as a car loan or a mortgage, it might be smart to delay the purchase or to hold off on the balance transfer, he says.