Credit Card Balance Transfers: How They Work and If They’re Worth It

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Credit card interest rate are notoriously high, often ranging between 15% and 20%. If you don’t pay off your balance each month, you can find yourself buried under a mountain of debt. A balance transfer can help you offload your debt from a higher rate card to a lower rate card, at least for a while.

A balance transfer can be a smart move, but it’s important to understand exactly how they work and all the implications, including the impact on your credit and how it fits into your debt repayment plans. Read on to learn everything you need to know about balance transfers.

How Balance Transfers Work

The idea behind a balance transfer is simple – move one or more high-interest balances to a new card with a lower annual percentage rate, often offered on promotion. Most of the best balance transfer credit cards offer low introductory APRs, allowing you to pay off your balance while earning less interest. There is a catch, however: balance transfer fees. These fees, which are usually between 3% and 5% of the transferred balance, can add up quickly, especially if you are transferring large balances.

A balance transfer card won’t help your debt magically disappear, but if used correctly it can help you pay off a balance much sooner while saving you money on interest and charges. costs.

Is a balance transfer a good idea?

A balance transfer can be a great way to tackle credit card debt, especially if you can commit to paying off the debt during an introductory period.

But a balance transfer can also go sideways. If you can pay off your debt in just a few months, you could find yourself paying more in fees than you would in interest on your current card. In this case, it is better to pay off your balance as soon as possible rather than transfer it.

You should also avoid balance transfer cards if you are easily tempted by credit cards. Opening a new credit card and freeing up credit on your existing cards can only encourage you to spend more.

Also, a balance transfer probably won’t work for you if you have bad credit. The best balance transfer offers are usually only available to those with good credit, and if you don’t qualify for a low introductory APR, you probably won’t save enough money to justify the hassle. .

Finally, you may need to consider a longer-term solution if you have significant credit card debt, such as a debt consolidation loan. Otherwise, you run the risk of paying too much in transfer fees and interest.

How to initiate a balance transfer

If you think a balance transfer card can help your finances, here’s how to get started.

1. Examine your debt

Before you even consider a balance transfer card, take inventory of your credit card debt. It’s important to know exactly how much you owe on each of your cards, your current interest rates and minimum monthly payments, and how much you can afford to pay each month. Look at how much you’re actually paying in interest each month – your APR might not mean much to you in theory, but seeing how much of your monthly payment was spent on interest alone can put things into perspective.

2. Do some research

Once you have your debt under control, you can shop for best balance transfer credit card. If you already have a credit card, your issuer may even send you balance transfer offers through your account or email, or may even send you balance transfer checks, which you can fill out to initiate a transfer. balance.

Many companies offer promotional offers where you can get 0% APR for a certain time after opening the card. These introductory periods often last around 12 months, although some last longer.

The introductory interest rate is important, but it’s not the only factor to consider. A low introductory interest rate is designed to lure you in – but if you can’t pay off the balance by the end of the introductory period, you’ll be stuck with another high APR.

Then compare balance transfer fee. Most companies charge between 3% and 5% of the balance you transfer. These fees can really add up with a large balance – a 3% transfer fee on a $5,000 balance is $150.

Finally, understand the credit requirements before applying. Although some cards approve borrowers with average or below average credit, the best offers are often reserved for applicants with good or excellent credit. It might not be worth applying and taking the hit on your credit if you don’t think you’ll be approved.

To apply, you will provide information about your income and employment and the credit card company will perform a credit check. If you meet all the conditions, you will probably be approved.

3. Allow balance transfer

Once approved, you can begin the balance transfer. This can usually be done by check, online or over the phone. To pay another card by check, your balance transfer card company will write a check to the issuer of the card you’re paying or send you balance transfer checks in the mail. If you do this online or over the phone, you will enter your account information for the card(s) you want to redeem.

The balance transfer process usually takes five to seven business days, but it can take up to three weeks. As such, you’ll want to continue making the minimum payments due on the card you’re paying for until the transfer is officially completed – otherwise you risk being penalized for a late payment on your credit report.

Once the transfer is complete, it will appear as a payment on the credit card you are paying. If you transferred the entire balance, the balance on your statement should be zero. The balance you transferred will appear on your new credit card statement.

4. Make regular payments

It is crucial to pay off the balance during the introductory period before the higher interest rate takes effect. Otherwise, you’ll be trapped in an expensive cycle, shifting balances from card to card, racking up fees and debt.

Instead, divide your total card balance by the number of months in your introductory period. This will give you an approximate target payout for each month.

What to look for in a balance transfer card

A balance transfer card is only useful if it can help you save on interest or fees. Here’s what to look for when looking for one.

  • Low Introductory APR: Many cards offer a 0% introductory rate – if you qualify. If you don’t have good credit, try to lock in the lowest introductory rate you can find.
  • Long introductory period: The longer the introductory period, the more you can save on interest and the less you have to pay each month. Many cards have 12-month introductory periods, but some offer introductory periods as long as 18-24 months, depending on your credit history.
  • Reduced transfer fees: These fees can add hundreds of dollars to your balance when you transfer your credit card debt. There are a few no-fee transfer cards, although the approval process can be more difficult. Calculate how much the transfer fee will end up costing you when comparing balance transfer options, so you won’t be surprised later.

What if I still have a balance after the introductory APR period expires?

Although we encourage you to try to pay off your balance in full before the end of the APR introductory period, sometimes this is not always possible. If you can pay off the balance within a few months, that’s usually your best course of action. But, if you’re worried about the new interest rate, it’s worth doing the math and knowing if the interest you’ll accrue will be less than the cost of another balance transfer. You can also consider a debt consolidation loan if you cannot pay off your balance during the introductory period of another balance transfer card.

It is possible to transfer your remaining balance to a new balance transfer card, but this strategy can be risky. Not only will you take a hit on your credit report when applying for a new account, but you also run the risk of being turned down or not being approved for the amount you need. If you are approved, you will also have to pay other balance transfer fees. A balance transfer card works best when used as a short-term debt solution strategy – continuing to transfer balances and pay fees can encourage unhealthy credit habits and can ultimately cost you more money. long term.

It’s always best to create a debt repayment plan to pay off your balance during your initial introductory period, if possible.

Can I use a balance transfer card to make purchases?

Technically, yes. But no.

There are three reasons why this is a bad idea. First, you secured your balance transfer card to help pay off your debt. Adding to that will only increase the amount you owe. Second, your balance transfer APR generally only applies to the amount transferred to your card (although some cards also have an introductory APR period for spending).

While you may have locked in an initial balance transfer APR of 0% for 12 months, the APR for purchases could be 13.99%. This means that you will add interest and additional expenses to your existing balance.

When you start using your balance transfer card like a regular credit card, you also increase the risk of not paying off your transferred balance during the introductory period. Not only are you increasing the amount you’ll have to pay each month, but you’re also making it harder to track your balance transfer debt from your new purchases.

Alternatives to Balance Transfers

If you have credit card debt of $10,000 or more, a personal debt consolidation loan may be helpful. Like credit cards, these loans are unsecured, and although their interest rates are higher than the 0% introductory offer on many credit cards, their regular rates are often well below the APR. standard on credit cards.

Other options to consider include a home equity loan, home equity line of credit (HELOC) or cash refinance. These loans are unsecured which means the interest rates will be significantly lower than a credit card or Personal loan. But there are also risks: every time you borrow against your home equity, you are putting your home up as collateral. If you can’t make your payments, you could lose your home.

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