Balance transfers involve moving outstanding debt from one credit card to another, usually a new one. Consumers often use this method to transfer balances from one credit card to another with a lower interest rate, fewer penalties, or better rewards, such as reward points or travel miles.
Exactly what is a balance transfer credit card? Many credit card companies offer free balance transfers to attract new customers. During the promotional or introductory period, no interest is charged on the transferred amount.
When you make a balance transfer, you are transferring a monthly balance. The grace period does not extend to the end of the grace period, so even if you have a 0% interest rate, you may have to assume surprise charges at the end.
It’s a good idea to compare these offers carefully so consumers can take advantage of these incentives and avoid high interest rates while paying down debt.
Key information:
- Consumers often use credit card balance transfers when they want to transfer debt from one credit card to another with a lower rate of interest.
- Many balance transfers are interest-free during the introductory period.
- There are many conditions and fees associated with credit transfers.
- Breaking an agreement can result in interest rates jumping to a severe penalty rate.
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What is the purpose of a balance transfer card?
Savings are possible through balance transfers. Imagine you have a $5,000 balance on a credit card with a 20% annual percentage rate (APR). If you take on the balance at that rate, it will cost you about $1,000 a year. By transferring the $5,000 balance to a new credit card with a 0% balance transfer offer, you will have a year to pay it off with no interest and only a balance transfer fee.
Additionally, failure to comply with any clause of the contract, such as late payments, exceeding the credit limit, or bouncing a check, can result in the interest rate jumping to 29.99%.
Usually, the 0% rate is valid for 12 to 18 months, sometimes even longer. In this case, you must answer the following question: Are you able to pay the transferred balance during that time? After the grace period, what interest rate will you be charged? You won’t receive a notice from the credit card company when the promotional rate ends. You must be attentive.
Keep Reading: How to transfer money from a credit card to a debit card
How does the balance transfer work?
Say you have two credit cards. There is one with a higher interest rate than the other. By contacting the lender, you can transfer the balance of the card with a higher interest rate to the card with a lower interest rate.
It may be possible for you to make use of low-interest rate credit card balance transfer offers if you have only one high-interest credit card. Once approved, apply for a new credit card with a lower interest rate, and then follow the steps to transfer your balance.
Even if you have a lot of credit cards with high interest rates, balance transfers can work for you. As long as the balance transfer does not exceed the credit limit, you can transfer more than one balance to the card with a lower rate.
How does a balance transfer benefit me?
Credit card balance transfers can save you money. The higher the interest rate, the more you’ll pay in the long run. When you transfer a balance to a credit card with a lower interest rate, you will see greater long-term savings.
You will also simplify your credit card payments. When you have multiple credit cards with different expiration dates and high interest rates, it can be difficult to manage them. Transferring balances to a low-interest rate credit card can help you consolidate debt and manage it more easily.
What types of debts can I transfer to a credit card?
It is possible to transfer balances from other credit cards and loans, including personal, auto, and student loans. It is possible, however, that you cannot transfer balances between accounts with the same financial institution or credit card company. Make sure to check the terms of your credit card to find out what types of balances you can transfer.
It could take several weeks for your balance transfer to be completed, depending on how you transfer your funds and how quickly both creditors process the payments.
During this time, make sure to keep paying off all your accounts as soon as possible. Otherwise, you might end up with a late payment, which could mean you’ll have to pay late fees.
Mistakes to avoid
If the cardholder is late with the payment or declares bankruptcy, the transfer may be rejected as well.
Even without a 0% rate offer, a balance transfer might work, but you have to do the math right. For example, let’s assume you have a $3,000 balance and a 30% interest rate. This equates to $900 in interest every year. If the balance is transferred to a card with a 27% annual interest rate and a 3% transfer fee, it would cost $810 in interest plus a $90 balance transfer fee. The break-even point is one year after the transfer.
For the move to make sense in this example, the APR needs to be less than 27%. You could ask the card issuer to reduce the interest rate to 27% or lower, thereby saving the balance transfer fee.
Companies offering credit cards to cardholders experiencing financial difficulties are offering assistance during the current Coronavirus epidemic. Card issuers encourage cardholders in such a situation to speak with a representative about their options. They include the reduction of your interest rate, preventing late charges, or omitting payments.
Where to look?
Checking out credit card comparison websites may lead you to believe that these sites receive commissions from the card companies when someone applies through their site and is approved. Additionally, some companies may manipulate the information that these websites publish about your credit cards, for this reason the details about the costs may not be entirely accurate.
The Consumer Financial Protection Bureau offers guidance on buying from issuers and comparison sites.
Where can people find information on credit card balance transfers?
Ask the credit card company if the rate is automatic or based on a credit check after you receive a card with a 0% interest balance transfer offer. Next, determine which balances need to be transferred; cards with high interest rates should be the first to go.
Request the balance transfer
A balance transfer is actually a payment from one credit card to another. The process is as follows:
A balance transfer check
A check is issued by the new issuer of the card to which the balance is transferred, and a check is written by the cardholder in the name of the new card company.
There are some credit card companies that allow cardholders to write checks in their name, but ensure that this is not considered a cash advance.
Transfers online or by phone
The cardholder provides the new credit card company with account information and the amount to be paid off, and the new credit card company arranges for the funds to be transferred.
Imagine you have a balance of $5,000 on your Visa card and plan to transfer it to a MasterCard offering 0% interest. Then you’ll need to provide MasterCard with your Visa card number, payment address, and account number and specify that you want $5,000 deposited into your account.
Direct deposit
The cardholder must provide the routing number of the bank account where the funds will be deposited.
You should allow at least two or three days (perhaps up to 10) for the new creditor to pay the old one, and then check both accounts to verify that the transfer has actually taken place.
Attention with the balance transfer grace period
Grace periods refer to the period between the end of the credit card billing cycle and the due date of the bill. The cardholder does not have to pay interest on new purchases during that period (of at least 21 days, by law).
Beware of promotions
In their promotional offers, many card issuers fail to clearly state their terms, according to the Consumer Financial Protection Bureau. It is their responsibility to tell customers how grace periods work. The marketing process, the application process, as well as account statements, among others.
It is important to note that many offers stipulate that the cardholder’s credit score determines the actual number of 0% rate months in the introductory period.
You should stop the balance transfer process and look for an option with clearer terms if the terms of the grace period for purchases following a balance transfer are unclear. Accept a credit card that offers 0% introductory APR on balance transfers, but do not make any purchases until the balance transfer has cleared; or choose a credit card that offers 0% introductory APR on both balance transfers and new purchases.
When it transfers to existing cards
You can also transfer balances with an existing card, especially if the issuer is running a special promotion. This can be tricky if the existing card already has a balance that will only be increased by the transfer.
A cardholder owes $2,000 on a card with a 15% annual interest rate before transferring a $1,000 balance from a second card. There is a 0% balance transfer rate for six months. Cardholder pays $1,000 over six months, but since the 0% portion of the debt is paid up front, the 15% APR for six months applies to the $2,000 that was not affected by the payments. In the meantime, the card from which the $1,000 was transferred has an APR of 12%, which represents a 3% loss.
How it affects the credit score
Imagine that you have a $10,000 credit limit and a $1,250 balance on your card. This means that you are using 12.5% of your credit limit. You are now using 62.5% of your credit limit if you transfer $5,000, making a total balance of $6,250. If your credit score drops due to an increase in your credit card balance, your interest rate may rise on this card and others. On the other hand, the $5,000 balance on the higher interest card may compensate for this.
Compare personal loans
Most financial advisors believe that balance transfers between credit cards only make sense if the cardholder can pay off all or most of the debt during the promotional rate period. After that period is over, the cardholder is likely to face another high interest rate on the card balance. It is probably best to apply for a personal loan (with lower or fixed interest rates) in this situation.
If the personal loan must be secured, the cardholder may not feel comfortable pledging assets as collateral. Since credit card debt is unsecured, the card issuer is unlikely to sue and pursue the cardholder’s assets in the event of default. A secured personal loan allows the lender to recoup losses by taking assets.
Keep Reading: Transferring money from a credit card to a bank account
Disadvantages of using a balance transfer
Balance transfers may also have drawbacks.
Many credit cards charge a balance transfer fee, usually 3% to 5% of the amount transferred (with a minimum of a few dollars). To determine whether a balance transfer makes sense for you, you can compare how much you could save in interest against how much you would pay in fees.
Additionally, if you keep adding new purchases and don’t focus on paying off the balance you transferred, you may find yourself getting deeper into debt.
Here are some tips to help you transfer your balance successfully
Here are some tips to keep in mind if you plan to use a balance transfer credit card or are considering one.
Read the terms of your offer carefully.
If you’re considering a balance transfer, it might be especially important to read the fine print. Consider these things:
- Balance transfer fees for your credit card
- What is the duration of an introductory interest rate?
- To take advantage of the promotional offer, you have a limited time to complete a balance transfer
- Whether there is an introductory fee for purchases and balance transfers
- And how much you can transfer
Make a note of important dates in your calendar
An introductory interest rate of 0% may only be offered on balance transfers made within a certain period of time with a credit card. Furthermore, some cards waive the balance transfer fee if you complete the transfer within a certain period of time after opening the card.
It can be overwhelming, so it’s a good idea to mark your calendar for the end of the introductory period, and maybe even the middle. Staying on track while paying off your debt can be made easier with these notes.
Have a plan to pay off debt
Prepare a plan for how you will pay for the balance transfer. If you applied for a card with an introductory interest rate on balance transfers, you should make a plan to repay the transferred balance before the end of the introductory period. Otherwise, you will have to pay interest on the remaining balance. Plan how you’ll pay off any balances that you weren’t able to transfer.
Don’t make any purchases with your new card.
In order to make faster progress on paying down debt, you should avoid making purchases with the card you transferred the balance to. In addition, keep in mind that many cards offer promotional interest rates on balance transfers, but not on purchases, in which case the interest on those purchases could add up quickly.
Summary
After understanding the fine print of the terms, doing the right math, and creating a realistic budget where you pay off the balance before making new purchases, accepting an 0% interest offer on a new credit card could be a smart move.
