Balance transfer can be a useful credit card tool to pay off higher interest debt.
What is a balance transfer?
A balance transfer is moving a balance from one credit card or debt to another credit card. Transferring balances with a higher annual percentage rate to a card with a lower APR can save you money on the interest you will pay. Balance transfers can also simplify bills by consolidating several balances from various creditors onto one card with one payment.
Suppose you have a credit card balance of $5,000 on a card with an APR rate of 15%. Transfer the balance to another card with an APR rate offer of 0% and pay it during the term of the offer can help you save hundreds of dollars in interest and pay off credit card debt faster.
Is it convenient to make a balance transfer? 4 questions to consider
- When does the promotional period end? Introductory or promotional rates on new cards usually end between 9 and 21 months after they take effect. To maximize your savings, determine how long the low rate lasts and how much more you can pay before it ends. Be sure to stay current with your payments, because failure to make a payment on time will most likely cancel your promotional rate and you will have to start paying interest at the higher standard or APR rate in the account agreement.
- What are the initial charges? When transferring a balance to a credit card, you generally pay a transaction fee of 3% to 5% of the amount transferred. However, the long-term savings from the promotional rate can often offset the cost of this fee.
- What happens when the promotional rate expires? Once the introductory or promotional rate period ends, the contractual rate takes effect on the unpaid balance. If you still have a balance at the end of the promotional term, going from an interest rate of 0% to a higher rate in one month may result in an increase in your agreed minimum payment. Be prepared for this and make adjustments to any automatic payment arrangements you have.
- What are the different APR rates? In general, balance transfers have one APR, while other transactions, such as purchases, cash advances or checks, have their own interest rates. It is important to be aware of all APRs and to keep in mind which type of transaction a promotional or introductory rate offer applies to (and which one you are likely to use) when comparing offers.
How do I complete a balance transfer?
The process is not complicated, however, it helps to know in advance the steps to follow:
- View your current balances and the interest on each.
- For a new introductory offer on a credit card, many applications include the option to request a balance transfer in the same application. For balance transfer offers on a card you may already have, the lender will likely tell you the quickest and easiest way to apply. Many lenders allow you to view their offers and request the balance transfer in their mobile app or online banking.
- Look for a credit card to which you will transfer the balance, with the right combination of low APR, low (or no fee) transfer fee and long promotional period.
- Consider how much you will need to pay each month in order to pay off your balance before the introductory rate expires. This amount will usually be more than the required minimum monthly payment your creditor will charge you. Try using a balance transfer savings calculator to determine the correct payment amount.
- If approved, use online or mobile banking or call the customer service number on your new card to transfer the balance from your old card. You will need the complete account number for each balance you plan to pay and the current balances. In some instances, you may also need to know the payment billing address for the vendor.
- Balance transfers can take a few days or up to two weeks when requested with a new credit card application. So it is important that you continue to pay your creditors at least the minimum payment due until the balance transfer you requested for those accounts is reflected as a payment.
What else do you need to know?
Transferring a balance to reduce your interest charges may be a smart move, but it's only one of the many ways to reduce your interest charges. several strategies to reduce your debt.
Even if you don't qualify for a low contractual or promotional APR, a balance transfer could still help. Combining debt can simplify your life and give you fewer bills to pay and fewer creditors to deal with. Depending on the size of your debt and whether you will need more time than the promotional period to pay it off. Doing a debt consolidation with a personal loan may be a better solution for your needs.
And remember: it is wise to pay off high-interest debts. Balance transfers are a good option, but in the meantime it is important not to incur more debt.