What is a balance transfer?
Credit card balance transfers are simply the process of transferring the debt from one credit card to another one. For example, if you owe $5,000 on credit card A, and you transferred this over to credit card B, you have just completed a credit card balance transfer.
Under most circumstances, credit card balance transfers are done to save on interest payments for each billing cycle. In fact, it’s quite common to see credit card companies offering options, such as, “0% interest on credit card balance transfer for 18 months.”
However, there are many things you need to know about credit card balance transfers before you take the leap and jump into a new card.
The most obvious advantage that credit card balance transfers will offer is that, quite often, the interest rate on the debt will be lower than the original interest payment. For example, your existing credit card may have an interest rate of 14%, while another credit card may offer the balance transfer at 0% for six months, followed by a “low APR.” For six months, you won’t have to worry about paying interest, and you can catch up on some of your debts. Beyond that, it may simply be that the new credit card has a lower interest rate over the long term as well, which will also save quite a bit of money.
Credit card balance transfers also allow you to consolidate many of your debts. If you have several credit cards, it’s much easier to deal with one credit card company and one payment a month. If you have a lower interest rate on your new card compared to your various older ones, that’s even better. This is essentially a “double whammy” as far as savings are concerned.
Some other debts can be transferred as well, not just credit cards. Quite often, you can transfer debts, such as loans for cars, appliances, furniture, and other monthly payments, to a no interest balance transfer credit card, saving on longer-term costs.
Some Potential Issues
Many people repeat transfer. This means that they simply apply for a new balance transfer card when the introductory rates are through. In theory, you could go free and clear as far as paying interest on your credit card purchases. However, this is not encouraged over the long term. While repeat balance transfers are theoretically possible, it’s not advised because of the damage that it can do to your credit score.
Zero interest rate balance transfer cards were widely available before the financial crisis but became much less common and even less generous after this difficult time. The best terms for these types of cards are usually only available for those who have either good or excellent credit. If you can qualify for these cards, you may save significant money and be able to pay off your debt sooner. However, this is going to be different for each person, so by all means, if you do apply for these cards, keep in mind that your credit history will have a major influence on what you are able to save.
One thing that people fail to keep in mind is that transfer rates expire. A new card is often attractive because of the ultra-low annual percentage rate to begin with. However, after a set amount of time, perhaps as little as six months, the interest rate will increase to somewhere between 12% and 18%, potentially making it even more expensive than the card you transferred from. Because of this, you need to pay close attention to what the interest will be later down the road. You may end up owing more money by the time it’s all said and done.
New purchases quite often don’t benefit from the 0% interest rate. Quite frankly, these typically act just like any other credit card, and that’s exactly what the credit card companies are hoping you will do: buy more stuff on the new card. The teaser rate is exactly how they get you into this situation.
Beyond that, there are quite often fees attached to making a swap from one card to the other, known as a “balance transfer fee”, and this is typically a percentage of the transfer amount. For example, the most common balance transfer fee is 3%, so if you transfer $20,000 from one card to the other, you’ll be paying $600 in fees.
As Usual, The Answer is Being Quick About Paying
The best thing you can do for your credit card balance is to pay it off as quickly as possible. If you get a 0% balance transfer for a limited amount of time, your number one goal should be to pay off as much of that debt as possible in a short amount of time. If you can pay it all off, you will be in great financial shape. If you cannot and are simply looking for a way to save a bit of money for the short term, you might find that it’s actually more expensive over time to switch cards so make sure to do the necessary research.