What Is A Balance Transfer: What You Need To Know

A balance transfer is a process of moving credit card debt from one card to another or transferring other debts to a credit card. Consider a balance transfer to consolidate debt or to take advantage of a lower interest rate, like a 0% introductory APR. Read on to understand what is a balance transfer, when you might use it, and the key advantages here. 

What Is A Balance Transfer?

A credit card balance transfer is moving existing credit card debt to another card. This is usually done to take advantage of lower interest rates or promotional offers. Usually, credit cards charge a fee of 3% to 5% on the transferred amount.

A balance transfer can save a lot on interest charges if you're working to pay off high-interest debt. For example, debt that's moved to a credit card with a 0% introductory APR offer on balance transfers could be paid off interest-free. However, because of credit card balance transfer fees, it's also not always the best option. 

How Does a Balance Transfer Work?

The steps involved in a balance transfer vary from person to person. If you want to apply for a new credit card with a 0% introductory APR, that's the first step. The introductory 0% APR period is crucial in temporarily avoiding interest accrual. 

How do balance transfers work? Assuming you plan to make the credit card balance transfer to a new 0% APR card, here are the steps to consider:  

Choosing The Right Balance Transfer Card

When choosing the right credit card for a balance transfer, you'll want to consider total costs, fees, introductory period, and balance transfer fees. It can help to make a list or spreadsheet to compare possible cards with:

• Introductory APR period (usually 12-21 months)
• Credit card balance transfer fees
• Annual fees

The ideal card will have no annual fee, a low balance transfer fee (3% or ideally less), and an introductory APR period long enough for you to pay off the debt. Comparing different offers to find the best fit for your financial situation.

Initiating The Balance Transfer

When preparing to make a balance transfer, you can fill out a new credit card application online. You'll be asked to provide personal and financial information, including full name, address, social security number, and income information. 

After you're accepted for the new credit card and receive it, the card issuer handles the balance transfer, typically involving communication with the old credit card company. You can initiate a credit card balance transfer by speaking with the credit card issuer on the phone or online. 

Making The Most of The Introductory Period

A 0% APR introductory period means interest accrual is temporarily suspended on the transferred balance. This gives you a chance to pay it off before the initial period ends. Make consistent payments and avoid new purchases during this period to maximize the savings and save more on interest. 

Managing Repayments

Maintaining a repayment plan throughout the introductory period usually involves setting and sticking with a budget. You can use budgeting apps or create a spreadsheet and track monthly expenses. 

Check the total for essential expenses like food, housing, transportation, insurance, and medical care compared to your total income. The difference is your discretionary income, which you can allocate to paying off the debt, as well as savings and non-essential expenses like entertainment, vacations, or eating out.   

To pay off the transferred balance before the introductory offer expires, focus on minimizing non-essential expenses, and cutting back where you can on essential expenses, to maximize credit card payments and savings. 

Potential Fees And Considerations

The potential fees associated with credit card balance transfers include balance transfer fees, late payment penalties, or even exceeding the card's credit limit.

Check total fees before selecting a credit card to minimize balance transfer fees. You can avoid missed payments by setting up automatic payments from your bank account with the card's minimum due. And finally, to avoid exceeding the credit limit, check the credit limit and the maximum credit utilization you want before making the credit card balance transfer. 

Benefits Of Balance Transfers

Credit card balance transfers can lead to significant interest savings by moving high-interest credit card debt to a card with a lower or 0% introductory APR. The potential to consolidate multiple credit card balances into one can also simplify debt management while helping you pay off cards more quickly. Here are other benefits to consider:

Reduced Interest Costs

Transferring a high-interest balance to a card with a lower or 0% introductory APR can result in substantial interest savings over time. Using the interest-free period to pay down the principal balance aggressively is vital to avoid additional facing high-interest rates later on. 

Debt Consolidation

The convenience of consolidating multiple credit card balances onto a single card makes tracking and managing payments easier. This can lead to lower minimum payments and a clearer debt repayment strategy. You'll also be able to track your debt repayment progress more easily. 

Improved Credit Score

One potential positive impact on the credit score happens when credit card balances are lowered or consolidated. If you apply for a new credit card and are approved, your total available credit may increase, lowering your credit utilization ratio. 

You may see a boost in your credit score from the first month. Likewise, maintaining on-time payments during the balance transfer period can improve credit health long-term.

Pay Off Debt Sooner

Directing more funds towards the principal balance during the introductory period, rather than interest payments, can help pay off debt faster. Paying off debt sooner can bring a sense of accomplishment and financial relief.

Financial Flexibility

Credit card balance transfers can provide individuals with a temporary financial breather by suspending interest charges. You'll be free to allocate additional funds to pay the principal or build an emergency savings fund.

Simplified Debt Management

Consolidating balances onto a single card simplifies debt tracking and reduces the number of monthly payments. You'll have an easier time tracking payments and paying off debt. 

To facilitate this, create a budget and repayment plan to pay the debt in full and take advantage of the 0% APR transfer benefits.

Excellent Cards for Transferring Balances

Several credit card issuers offer specific cards designed for credit card balance transfers, including US Bank, Wells Fargo, Capital One, and Citi. These cards often come with promotional 0% APR periods and low or no balance transfer fees. Find details on the best introductory no-fee balance transfer cards or the best balance transfer cards. 

Should You Transfer A Credit Card Balance?

Whether you'll be able to take advantage of a 0% APR introductory period is one key factor in deciding whether it's worth making a credit card balance transfer. Another factor is how quickly you can pay off the debt. 

For example, if you have $5,000 in credit card debt but can pay off the total amount next month, the balance transfer fees are only sometimes worth the transfer. In that case, even with a 30% APR, you'll pay $120 in interest for 30 days. If the credit card charges a 3% balance transfer fee, you'll pay $150. 
Whether you should transfer a credit card balance depends on total debt, transfer fees, and introductory period. With some research and planning, a credit card balance transfer can help you save significantly on interest payments while paying off debt.

Frequently Asked Questions