There are a lot of terms thrown around in the credit card industry. We demystify the term “balance transfer” for you.
A balance transfer means that, for a one-time fee, you take the balance of your debt on one or more credit cards and move that amount to another card. Simple, right?
So, why do balance transfers matter? They can be a great option if you’re paying heavy interest on your credit card. With a balance transfer, you can move your existing balance to another card offering low or no interest for a period of time. This can help you pay off your debt faster and more cheaply.
Our pick for balance transfers: Blue Cash Everyday® Card from American ExpressRead more
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Understanding balance transfers
Let’s say Mary has a credit card with a balance of $5,000 and 20% interest rate.
A 20% interest rate is pretty high, and interest is compounded daily. This means that while Mary is trying to pay off her debt, interest on her balance keeps accumulating. Wouldn’t it be nice to have a break from that 20% APR for a bit?
That’s where a balance transfer card can come in handy. For example:
- Mary finds a card that offers 0% APR for 15 months on balance transfers.
- She transfers her current balance of $5,000 to the new card. She also pays a fee of 3% of the transfer, which comes out to $150.
- The balance on the new card won’t accumulate interest for 15 months. Mary can pay off her debt knowing that it won’t increase for quite a while, as long as she doesn’t add to it with more spending.
Balance transfers: Let’s dive into the basics
A balance transfer is an efficient option to help pay off your debt. Before applying for a balance transfer credit card, take note of the following so you’re not taken by surprise:
You’ll pay a fee for the balance transfer
When you move your balance to a new card, you’ll need to pay a balance transfer fee. As an example, let’s say a card’s balance transfer fee is 3%. If you’re transferring $1,000, you’ll pay a fee of $1,000 x 3% = $30.
You’ll get a great APR on your transferred balance
A good balance transfer card will offer 0% interest for a while on the debt you transfer. A really good balance transfer card will give you 0% APR for a long time. Instead of getting 0% APR for six months, for example, you could get 0% for 21 months.
After the introductory APR ends, you’ll start paying interest
Some people forget to keep track of when their introductory APR expires, then are surprised when they’re charged interest. Consider how long your low intro APR lasts, and if you can pay off your balance within that time.
It’s important to make monthly payments on time
Here’s one of those conditions that might throw you for a loop: You only get the nice 0% APR if you make your monthly payments on time. For just one late payment, your credit card provider may revoke the promotional APR. This is a great reason to schedule automatic payments.
The process can take a while
Balance transfers are usually completed within 7 to 10 days. In the meantime, keep up with your current monthly payments to avoid taking any hits to your credit.
Have good credit helps
Credit card providers usually require good credit to initiate a balance transfer. However, if you look around, you can find some great balance transfer cards for poor credit.
You can transfer more than credit card debt
Credit card debt is the most common debt moved with balance transfers, but you may also be able to transfer auto loans, mortgages, and student loans.
What to watch out for
A 0% interest rate on a balance transfer for several months might sound too good to be true. What’s the catch? There are a few incentives for credit card companies to offer low-APR promotions on balance transfers. Here are a few of them:
- It’s a cheap way to get a new customer. It can cost a lot for a credit card company to lure new customers. Instead of spending all those marketing dollars to reach you, a card provider might offer a really good balance transfer promotion instead. They bank on you telling others about the great deal you got with them — essentially doing free marketing for the card company.
- After the low-APR promotion ends, you’ll start paying interest on your balance. Once that low-APR promotion ends your remaining balance is subject to a much higher interest rate. A credit card company can make hundreds or even thousands of dollars from you in interest charges. To avoid this, we recommend paying off your entire balance before your low interest introductory rate ends.
- You might make purchases with the credit card. Your primary reason for getting a balance transfer card may be to get help paying off your debt — but once you make a purchase with your credit card, you’ll pay interest. This makes the credit card company money.
Balance transfer cards might seem too good to be true, but fortunately they’re not. As long as you use them carefully, they can be great options for paying off debt.
How to choose the right card
Finding the right balance transfer card can be your ticket to get you out of debt faster. But finding the right card for you depends on the amount of debt you want to transfer, your credit score and any perks the card offers.
When you’re comparing balance transfer cards, consider the transfer APR and how long it lasts, any fees you’ll pay for the transfer and other benefits like rewards.
The balance transfer process
Starting a balance transfer is simple. Here’s how the process works:
- Choose the best balance transfer card for your needs. Look at factors like how long the promotional APR lasts, what fees you’ll pay, and what rewards you’ll receive.
- Check how much you can transfer. There may be a balance transfer limit that is linked to your credit limit on the card. Before submitting an application, check how much you’re allowed to transfer.
- Submit your application. First, make sure you meet the eligibility requirements. Then gather the required documents and send out the application.
- Sit tight and wait for approval. This usually takes between 7 to 10 days.
- Confirm your transfer. Check that the balance transfer was completed as expected.
- Pay your balance within the intro period. It’s important users pay off their initial balance transfer before the intro period ends so they don’t revert.
Opening a balance transfer card can improve your chances of paying off your debt. By utilizing the low APR intro period you could save hundreds of dollars — just be careful about adding to the debt. Before you decide is opening a balance transfer credit card is for you, compare your options.