Credit card balance transfers: how they work and if they are worth it
Credit card interest rates are noticeably high: the average was 16% in early July. If you don’t pay off your balance every month, you can find yourself buried in a mountain of debt. A balance transfer can help you offload your debt from a high 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. A lot ofoffer low introductory APRs, which allow you to pay off your balance while earning less interest. There is one catch though: the balance transfer fee. 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 magically help your debt go away, 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 end up 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 transferring 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.
Plus, a balance transfer probably won’t work for you if your credit is low. The best balance transfer deals 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 overpaying in transfer fees and interest down the line.
How to initiate a balance transfer
If you think a balance transfer card can help your finances, here’s how to get started.
1. Review your debt
Before even considering a balance transfer card, take inventory of your 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 actually pay in interest each month – your APR may not mean much to you in theory, but seeing how much of your monthly payment is spent on interest alone can put things in perspective.
2. Do your research
Once you get your debt under control, you can shop for the. 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. pay.
Many companies have promotional offers where you can get 0% APR for a period of time after you open the card. These introductory periods often last around 12 months, although some last longer.
The introductory interest rate is important, but it is not the only factor to consider. A low introductory interest rate is designed to lure you in, but if you can’t pay the balance by the end of the introductory period, you’ll be stuck with another high APR.
Then compare the balance transfer fees. Most companies charge between 3% and 5% of the balance you transfer. These fees can really add to a large balance: a 3% transfer fee on a $ 5,000 balance is $ 150.
Finally, understand the credit requirements before you apply. While some cards will approve borrowers with, 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 think you won’t 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 likely be approved.
3. Authorize the balance transfer
Once approved, you can begin the balance transfer. This can usually be done by check, online, or over the phone. To pay for another card by check, the company that issued your balance transfer card will write a check to the issuer of the card you are paying or send you balance transfer checks by mail. If done online or over the phone, you will enter your account information for the card (s) you wish to pay for.
The balance transfer process typically 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 until the transfer is officially made – otherwise you risk falling victim to a late payment on your account..
Once the transfer is complete, it will show up as a payment to the credit card you are paying. If you transferred the entire balance, your statement balance 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 kicks in. Otherwise, you will be trapped in an expensive cycle, transferring balances from card to card, racking up fees and debts.
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 a lot of 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 18-24 month introductory periods, 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 free transfer cards out there, although the approval process can be more difficult. Calculate how much the transfer fee will end up costing you when you compare balance transfer options, so you won’t be surprised later.
What happens if I still have a balance after the APR introductory period has expired?
While we encourage you to try and pay off your entire balance before the APR introductory period ends, sometimes this is not always possible. If you can pay off the balance in a few months, that’s usually your best bet. But if you’re worried about the new interest rate, it’s worth doing the math and knowing if the interest you’ll earn will be less than the cost of another balance transfer. Alternatively, you can 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 damage your credit report when you apply for a new account, but you also run the risk of being refused or not approved for the amount you need. If you are approved, you will also need 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 paying 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 of all, you have secured your balance transfer card to help you pay off your debt. Adding to this will only increase the amount you owe. Second, your balance transfer APR usually only applies to the amount transferred to your card (although some cards also have an introductory APR period for spending).
While you may have blocked a 0% introductory balance transfer APR for 12 months, the APR for purchases could be 13.99%. This means that you will be adding interest and additional expenses to your existing balance.
When you start to use 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 also make it harder to keep track of your new purchases balance transfer debt.
Alternatives to balance transfers
If you have credit card debt of $ 10,000 or more, a personal debt consolidation loan may be worth considering. Like credit cards, these loans are unsecured, and while their interest rates are higher than the introductory 0% offer on many credit cards, their regular rates are often much lower than the standard APR for credit cards. credit card.
Other options to consider include a home equity loan, home equity line of credit (HELOC), or cash refinance. These loans are secured, which means that the interest rates will be significantly lower than with a credit card or. But there are also risks: Every time you borrow against the equity in your home, you are putting your home as collateral. If you can’t make your payments, you could lose your home.