A balance transfer is a very convenient financial aid, as it lets you transfer the balance from one of your credit cards to another credit card. But why would you go through the process of getting a balance transfer when some banks are offering other options?
Why Balance Transfer
Are you or your loved one in credit card debt? Are you struggling to pay interest every month?
When the interest value is high, you might be under the impression that you can do nothing to improve your credit card balance. This is exactly where a balance transfer comes in as a lifeline.
The primary purpose of a balance transfer is to help you consolidate your card debt. With everything in one place, it will be easier for you to keep track of your payments and balance in the future.
Furthermore, if you use it to transfer the debt to a card with less interest, you can end up with reduced outgoings, thus saving more money and paying off the outstanding balance sooner.
The next logical question in line is: “In which situations is a balance transfer a good idea?”
Debt Consolidation – A Financial Life Simplified
You can use balance transfer in many scenarios. For instance, if you have high balances on 4 credit cards with 24% – 31% interest rates, your financial life can become very complicated. You will have to juggle different payment dates and make sure to make those minimum payments.
If you fail to do so, you will have to pay late fees, which stretches your budget even thinner down the line. Balance transfer will help you consolidate multiple payments on just one card.
It will become much easier for you to track payment dates. Besides, if you manage to get a credit card with no or a low-interest rate, you will also end up saving some extra cash.
Consolidation of Various Types of Loans
Many people think that a balance transfer can only be used to transfer debts from credit cards. A balance transfer is generally a good idea if you have any other type of debts, including:
You can consolidate all your monthly installment payments on just one credit card using the balance transfer.
Save Cash By Reducing Monthly Payment Amounts
And, finally, you can use a balance transfer if you can no longer sustain monthly payment amounts.
A balance transfer is a perfect solution for anyone who is on the lookout for another way to save money. Some banks offer credit cards with a 0% introductory APR (Annual Percentage Rate) for balance transfers.
If you transfer your credit card balances to this type of account, you can benefit from the promotional period, in terms of not having to pay interest on the transferred balance.
The only thing that you will have to pay is a certain fee. This fee varies as it is a percentage of the balance transferred. In most cases, this fee is significantly lower than the interests you would have to pay otherwise, which makes it worth pursuing.
7 Essentials You Should Understand about the Balance Transfer
For you to completely understand balance transfer, we have put together a list of key facts that are easy to scan through.
How long does it take to complete a balance transfer?
Unfortunately, there is no simple answer to this question. Every credit card issuer is different, with unique terms and work methodology.
Generally speaking, the process of completing a balance transfer can last anywhere between just 4 days and 2 months.
If a credit card issuer has support for the electronic balance transfer process, it will take a couple of days. On the other hand, some credit card issuers work by mail, which significantly prolongs the entire process.
How much money do I stand to save?
Many people look at balance transfer as a money saving solution. The question these people have on their minds is: “Will a balance transfer really help me save some cash?” The answer depends on several variables.
First, you have to know how much of a balance you have to pay off on your credit cards. You also need to check what the interest rate you are paying on that card is. To see this, check out your latest statement and look for your card’s APR.
Now you have to estimate how much money you can pay each month towards your debt.
Once you have all that sorted out, you should check how big the monthly payments will be, how long the introductory term is, and how big the fee is, once you transfer your balance to a credit card with a lower APR.
The calculation is somewhat complex because there are several variables. But, unfortunately, there is no easier way to check this. The amount of money you stand to save depends on:
- how long the introductory term is
- the size of the fee
- the APR % on the new card
Can I do a balance transfer for someone else?
Quite often a loved one or a family member can end up in a cycle of debt, struggling with monthly payments on several high-interest credit cards.
So the question of doing a balance transfer for someone else is quite a logical one. The answer depends on the card issuer’s policy.
Most of the issuers allow the balance transfer to be used without any limitations. After you sign the papers, the money is yours and you can do what you want with it, as long as you make regular monthly payments to the balance transfer issuer.
This is why the banks allow clients to make direct payments to their debts or make a direct deposit into their bank accounts. If you want to do a balance transfer for someone else, you will have to go with the latter option.
By which parameters should I pick a balance transfer card?
Not all balance transfer card issuers are the same. Each one of them offers quite specific terms and conditions.
This is why you should take your time to research the offers. What to look at? There are several things that you should always double check:
- Flat % fee – A balance transfer comes at a cost. Usually, the card issuer will charge you with a flat fee that can be anywhere between 3-7% of your total debt on other credit cards and loans.
- The introductory (grace) term – The intro term is another parameter to keep an eye on. During this period, you won’t need to pay an interest rate, and your monthly payment will be fixed. The intro term can vary, it is usually anywhere between 6 to 18 months. Beware though, in some cases, you will have to make a balance transfer within a limited time period to be eligible for a 0% APR period.
- The APR on the new credit card – After the intro term is over, a standard APR will apply to your monthly payment. Some card issuers offer balance transfer at fixed APR, while others include variable APR, which may be anywhere between 14 and 25%. Do your calculations to assess how the APR will affect the value of the monthly payment and to be sure that the balance transfer will actually help you save money.
- Card issuers internal process – We’ve already discussed this. Card issuers can do everything electronically or require the work to be done via mail.
If you want to expedite your balance transfer process, you should stick with the issuers who have digitized their operation.
What fees should I expect when doing a balance transfer?
Every time you do a balance transfer, a fixed % fee will be applied. The fee % will depend on the new card issuer. The fee you will end up paying will ultimately depend on the amount of your debt.
Let’s say you want to consolidate debt of a total $15,000 and get a balance transfer at a 4% fee. This means that you will have to pay a fee that equals 4% of your total $15,000 debt, which is $600.
When should I use a balance transfer?
People generally use a balance transfer when they accumulate a large balance on a high-interest credit card.
Instead of slowly repaying your debt while paying high interest every month, a balance transfer offers an option to pay it off immediately on the high-interest card, and start paying it off at a significantly lower interest rate.
Another balance transfer use scenario includes debts on multiple credit cards with semi-to-high-interest rates.
Thanks to balance transfer, people are able to consolidate those debts on one card.
This doesn’t only save them money in the long run, but also simplifies their financial lives and removes the risk of making payment errors, which result in costly penalties.
And, finally, you should consider using a balance transfer if you have any active loans with a high interest rate. This includes a car, home rebuild, appliances, and any other type of loan.
Using the balance transfer money, you can repay the loan completely and continue to make monthly payments to the new card issuer at a lower interest rate.
Can I use the new card?
You can use the newly issued card, but it is advised to check the issuer’s terms of service and look for the full rate plan.
If you get a 0% rate for the balance transfer amount it doesn’t necessarily mean that new purchases with the new card are going to be interest-free.
The lower or 0% rate usually applies only to the transferred balance. Any new purchases with the new card will most probably collect purchases at the regular APR. Make sure to check this with the card issuer before putting your new card into action.
Adding more debt will make it harder to pay off your transferred one, and if you make an insufficient payment, or you are late with a payment the introductory period of 0% APR can be rendered void.
7 PRO Tips to Help You Make the Right Decisions
Consider the tips below before you settle with the card issuer. They are designed to help you identify the best offer on the market, improve your odds of being offered better terms, and enable you to make an informed decision.
1. Longer promotional periods are a good thing
Why are longer promotional periods, technically know as “introductory periods” a good thing? During this period, your monthly payments will be APR-free.
The longer promotional period, the better, because you will get to pay off a great portion of your transferred balance, and pay an interest rate only for the remaining months. 0% interest rate period may last anywhere from 6 months to 2 years.
2. Keep a solid credit score
Before the big bad recession, the zero-interest balance transfer cards were quite common. Unfortunately, after the recession, the issuers became warier, which is why it’s not as easy to get one now.
This means that you will need to keep a solid credit score. The credit score can range between 300–850. A credit score of 700 or above is considered good.
To improve your credit score, give your best to pay off as much of your debts as you can. After doing so, you should apply to rebuild your credit score so that you can apply for a balance transfer card with an updated and better credit score.
3. Multiple 0% periods are usually too good to be true
Credit cards with multiple 0% periods are very attractive. But we urge you to dive into the terms and conditions of the card issuer to look at all the applicable rates and fees.
Most often, the issuers that offer these too-good-to-be-true deals also include variable APR. So you can easily end up paying well above 25% APR once the 0% introductory period is over.
4. Calculate the “go-to” rate
The go-to rate is the issuer’s interest rate that will reflect your monthly payments once the 0% or low interest rate introductory period is over. Before the institution of a go-to rate, you will enjoy paying only exactly what you owe.
These rates are disclosed in the credit card agreement.
Before you put your signature on it, make sure to check the rates and calculate exactly how much you will have to pay on a monthly basis to assess whether the balance transfer will help you save money at all.
5. Compare terms and rates patiently
Take all the time you need before you decide which credit card company to choose for the balance transfer. The best way to do it is to make your own spreadsheets. You can do it on paper or in Google Sheets or Microsoft Excel.
Put credit card company names in the rows, and brake down the following things into columns:
- Balance Transfer Fee
- Duration of Introductory Period
- APR during the introductory period
- And APR after the introductory period
Compare all the terms and rate patiently to choose the best option for you.
6. Include the transfer fees in your calculations
The transfer fee is a fixed percentage fee that you will have to pay for transferring your balance to your new credit card. The transfer fee can vary, but it is usually around 4% of the balance you are transferring.
7. The danger of balance transfer checks
You can receive your newly approved balance as a balance transfer check or electronic balance transfer.
If you choose to go with a balance transfer check, you will be responsible for using the funds to pay off balances on your other credit card(s). If you fail to do so, you will add more to an already existing debt.
This is why many people choose to go with an electronic balance transfer and let the bank take care of the transaction processes.
Balance Transfer Card Offers Recap
Balance Transfer FAQs. What People Ask About Balance Transfer Cards
The credit score is one of the major factors when it comes to getting your balance transfer approved or declined.
A good credit score is a sign that you know your way around finances, and it shows credit card companies that you are a responsible and conscious consumer.
The better your credit score is, the better of an offer you will receive. In the long term, a good credit score will help you enjoy a longer 0% APR period and lower interest rates. Make sure to improve your credit score before applying for a balance transfer.
Since there are many balance transfer opportunities on the market, you need to learn how to identify the best ones. This will require you to do some research. The best thing about comparison shopping is that it can get very fun.
Make a spreadsheet and put length interest-free period, balance transfer fee, annual fee, and interest rates in the columns or use balance transfer cards online comparison features.
Take a look at the offers and write down the company name along with each of these factors. Once you have a complete spreadsheet in front of you, it will be much easier to make a decision.
After you open a new credit card and place a balance transfer request, all you can do is wait. During this time, the credit card company will run a background check on you. They will take a closer look at your credit history, credit score, and how you generally handle your finances.
This information is very important for them, as they will use it to asses which terms to offer you. If you have impeccable credit history and a high credit score, there is nothing you should worry about.
There are several factors that we should consider here. Generally speaking, a balance transfer can both hurt and improve your credit score. How can it hurt your credit score?
- If you apply for several balance transfers at the same time, your credit score will suffer. This is because you will have to open a credit card prior to applying for a balance transfer.
- And the length of time your credit accounts have been open contributes to 15% of your credit score. This is why we advise you to do extensive research, open one card, and request a balance transfer. If you decide to keep the old account opened, it will help you keep the high credit score as well.
- If you transfer a balance to a credit card and exceed its limit, your credit score will suffer as well. Please check the card’s limit before you decide to open it and request a transfer.
- If you fail to do so, going over the credit card’s limit will increase your credit utilization ratio. CUR accounts for 30% of your credit score.
Once the balance transfer is complete, you can improve your credit score if you pay your card’s bill on time every month.
Once the balance transfer is complete you will have a new credit card. This new card is not any different from the cards you’ve used so far. You can use it to make purchases. There are several things that you should be aware of though.
Make sure to read the terms on the new card and check its limit. Some issuers will render your interest-free period void and introduce a high-interest rate if you cross the limit. You should also be aware of the penalties that you might face if you do anything wrong.
A balance transfer can also be used to help a family member stuck in debt under very bad terms and high-interest rates. Not all credit cards allow it, so you will have to do some research. The balance transfer works here, the same as usual.
Once you open a credit card and apply for the transfer you will be able to move the balance over to a new card. This is not free money, and you will still have to pay off the debt. This is why it is important to make certain arrangements with the person you are helping.