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Balance transfers save you from paying extra interest on your outstanding balance. When you have your interest rates holding you from clearing your credit card balances, transferring your balances to a new credit card with promotional 0% interest helps you to clear your debts in a much faster and more efficient way.
A balance transfer moves a balance from a credit card or loan to another credit card. Transferring balances with a higher annual percentage rate (APR) to a card with a lower APR can save you money on the interest you'll pay. Balance transfers can also simplify bills by consolidating several balances from different creditors onto one card with one payment.
Pros and cons of balance transfer credit cards
Balance transfer credit cards are the most popular way to consolidate debt, as they usually offer introductory 0% APRs. However, opening a new credit card may come with certain risks.
Pros
- Lower interest payments. Balance transfer credit cards often come with temporary 0% interest rates that offer an opportunity to save on interest payments.
- Faster debt repayment. When you are committed to paying off your debt and use the balance transfer credit card responsibly, you may be able to accelerate the debt repayment process.
- Potential credit score increase. When used responsibly, a balance transfer credit card has a positive impact on your credit scores. For example, when you make all payments on time, you build positive credit history and reduce your debt; both can contribute favorably to your credit scores.
Cons
- Requires high credit scores. Balance transfer credit cards with the longest 0% rate periods and best terms require applicants to have at least good credit scores.
- Often come with balance transfer fees. Many balance transfer credit cards charge a balance transfer fee of between 3% and 5% of the transferred amount. These fees may nullify your potential savings.
- Low interest rates are temporary. Balance transfer credit cards come with 0% intro APRs that do not last forever. These APRs are usually offered for 6 to 21 months. If you are unable to pay off the transferred balance during the introductory period, you can face a high ongoing interest rate that can reduce your anticipated savings.
- May temporarily lower your credit score. When you transfer balances to your new balance transfer credit card, you may drastically increase your credit utilization ratio. A high credit utilization ratio can cause your credit scores to temporarily go down. However, as you pay off your debt, your credit utilization ratio can improve, which can have a positive effect on your credit scores.
How to do a balance transfer
The exact process for balance transfers may vary from one card issuer to another. Here are the steps you generally have to take when working with major issuers:
1. Apply for a credit card with an introductory 0% APR on balance transfers. Please note that you generally need to have good or excellent credit to be able to qualify for a balance transfer credit card. Also, it's important to keep in mind that balance transfers between credit cards of the same issuer are not allowed. During the application process, you may be offered to transfer a balance without waiting for approval and your physical credit card to arrive. However, not all issuers will allow you to request a balance transfer during the application process.
2. Initiate the balance transfer. If you haven't done so during the application process, look for the balance transfer option in your online account or the issuer's mobile app. To initiate the balance transfer, you will need to provide information about the debt you are going to move: the amount of the debt you would like to transfer, the account number from which you would like to transfer, and the card issuer name.
3. Wait for the transfer to go through. Once the balance transfer is approved, wait for the transferred debt to show up on your new card account. The whole process can take up to two weeks or a bit longer. Please note that the card from which you are transferring the balance won't be closed automatically. Your old card will remain active, meaning you will have to pay any due payments, like annual fees, on this account before you close it.
4. Pay down the balance. When the balance is posted to your new card, you'll be responsible for making monthly payments on that account. If you manage to pay off the card balance in full before the 0% introductory period ends, you could potentially save a bundle.
When you are considering a balance transfer credit card, compare your options carefully, as the terms for each card may differ. For instance, while some balance transfer credit cards may have longer introductory APR periods, they may require you to finalize all your balance transfers within the designated time frame; others may offer shorter introductory periods but waive pricey transfer fees.
