What is a balance transfer, and should you consider it?
The world of credit and credit cards can be confusing for anyone. Given that so many Americans struggle with credit card debt every month, it is no secret that managing and building credit is difficult.
While credit cards can be the source of many credit issues, they can also be a great solution. One way that you can improve your credit and work towards getting debt free is with a balance transfer credit card.
If you have never heard of a balance transfer credit card, don’t worry. Here is a look at everything you need to know about balance transfer credit cards to maximize your finances.
What is a balance transfer?
Before we can dive into balance transfer credit cards, we should understand how a balance transfer works. A balance transfer is a process by which you transfer debt from one account to another.
A balance transfer does not eliminate your debt or even decrease it directly. It simply moves to another credit agreement you have in a different account.
So, what is the benefit of a balance transfer if it won’t decrease your debt? Well, if you transfer debt from an account that charges a higher interest rate to an account with a lower interest rate, you can help slow down the accumulation of more debt.
This can give you an incredibly helpful reprieve to help you tackle your debts.
What is a balance transfer credit card?
A balance transfer credit card, in turn, is any credit card that allows you the option to transfer a balance.
Not all credit card companies and other lenders provide accounts with balance transfer offers, and not all cards are beneficial to transfer a balance to. Here are a few things you may want to look for in a balance transfer credit card.
1. 0% introductory APR
The first thing you may want to ook for in a balance transfer credit card is a 0% APR. As noted by the Consumer Financial Protection Bureau, the APR of a credit card is the annual percentage rate, or the simple annual interest rate, of a credit card.
Many credit cards have APR interest charges of around 20%, but some cards with intro APR offer as low as 0% for up to the first few years of account opening.
Depending on the credit card offer and the length of the promotional period, you can find nearly interest-free cards for an extended period of time.
2. Low balance transfer fee
Another crucial feature to look for on a balance transfer credit card is a low balance transfer fee. While balance transfers can save you money in the long run, they might cost you upfront. Most credit cards charge a fee between three and five percent.
If you find a card that charges 3% or less, that might be a smart way to go.
3. High credit limit
Ideally, you may be able to find a card that offers you a high credit limit. High credit limits on your balance transfer cards can allow you to transfer a more considerable amount of your balance to the new, lower-interest-rate card.
Unfortunately, higher credit limit cards often come with higher APR and higher balance transfer fees. Ultimately it is about finding the balance that helps you the best.
4. Long introductory APR period
Lastly, you may want to look for a card with the most prolonged introductory low APR period possible. The best cards often offer 12 to 15-month APR periods.
The card’s APR will return to a standard percentage at some point, and you will start accruing interest on your balance again. The longer the introductory period is, the longer time you have to pay off your balance.
How to do balance transfers
The process of a balance transfer is pretty straightforward. Here are all the steps you need to follow to do a balance transfer and stop the interest accruing on a portion of your debt.
1. Apply for a balance transfer credit card
The first step is applying for your balance transfer credit card. You might want to check out several balance transfer options to maximize the four features discussed above.
You may want to also consider your credit history. Most credit card issuers run a credit report to verify that your personal finances are solid.
They want to know if cardholders will meet minimum payments and pay on time. Credit card issuers check your existing credit card accounts and FICO score. Your credit score can limit the intro offers, promotional interest rates, and available credit for which you’ll be eligible.
Once you’ve selected a new credit card, you can usually apply online and, in some cases, find out if you have been approved instantly.
2. Start the balance transfer
Once you’ve been approved for the balance transfer card, you can initiate the balance transfer.
You can sometimes do this online; other times, you may have to call the card issuer by phone. Other times it can even be done by check. You must have specific information on hand to complete the transfer, like account information, issuer, and the amount to be transferred.
3. Wait for the transfer
Then you’ll have to hang tight while the transfer goes through. This process can be much slower than a typical bank transfer or wire transfer that you might be used to. Bankrate states that the waiting period for balance transfers can last between a week to a month long.
A balance transfer can take two weeks to get approved and processed. At that point, you may see the previous balance from your old card plus the transfer fee added to your balance on the new account.
4. Pay off your debt
Lastly, it is wise to make sure you have a structured plan for paying off the balance on your new card to eliminate your balance before the introductory APR period has ended.
Remember that you will still have to pay minimum monthly payments on your balance transfer card to avoid late fees and penalties. You may also wish to avoid making additional purchases on the new card to avoid increasing the balance while still paying down your debt.
That’s all there is to it! Completing a balance transfer doesn’t have to feel so complicated after all.
Potential issues with a balance transfer credit card
While balance transfers can be an excellent option for many people struggling with high-interest debt, it doesn’t make sense in all situations or for all credit cards. Here are a few issues and pitfalls that can come with a balance transfer.
Low credit limit
You often won’t be able to know the exact credit limit you will be offered on a credit card until after you apply. This can mean you may get approved for a card that doesn’t provide enough credit to transfer all of your debt from one card to another.
Forbes explains that some financial institutions limit their balance transfers, capping them to the maximum in certain situations.
Poor credit score
Unfortunately, the best balance transfer credit cards tend to require good or excellent credit ratings.
Opening an account with American Express, Chase, Citi, or Discover can often only be done if you have a score of 690 or higher to be approved for many of the best balance transfer credit cards.
Paradoxically, people with higher credit scores are typically less likely to have debts they wish to transfer, making it harder to find a card with the benefits you want.
Bad budgeting
A balance transfer doesn’t decrease your debt; it only helps to limit the interest accruing on your debt.
If you don’t approach a balance transfer with the right mindset, you could end up with a balance when the introductory period ends and find yourself searching for another balance transfer card.
Some experts urge caution when applying for balance transfers, as reckless spending may result in more debt than you can easily repay. Make sure you use balance transfers as a tool to get out of debt and don’t rely on them as miracles.
A balance transfer shouldn’t be a way to make new purchases you don’t need just because you have low-interest debt. Poor budgeting is a quick way to run up more debt and fall further behind your due dates and repayments.
Alternatives to balance transfer credit cards
One alternative to a balance transfer credit card is a personal loan. While you will still have to pay interest on the loan, it can be much lower than on a high-interest credit card.
One advantage to a personal loan is that you can often get a much higher amount than you can get on a credit limit.
Remember that you will still have to be approved for a personal loan in the same process as you would for a credit card. The higher your credit score and the higher your income, the more you may be able to borrow.
That said, it can be an excellent choice for those dealing with high-interest debt.
Balance transfer credit cards: summary
There is nothing too complex or scary about a balance transfer credit card. Balance transfer credit cards can help you move around your debts to avoid high-interest rates and help you stay afloat when dealing with debt.
Using balance transfers wisely can be a great way to boost your debt recovery plan.
Just be sure that you are looking for a credit card that offers a low introductory APR period that is as long as possible, a high credit limit, and a low balance transfer fee. By maximizing those variables, you can get the best situation.
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Sources
Bad Credit? Here’s What You Need to Know About Balance Transfers | Experian
What Is a Credit Card Interest Rate? What Does APR Mean? | Consumer Financial Protection Bureau
Why the largest credit card companies are suppressing actual payment data on your credit report | Consumer Financial Protection Bureau
Credit Cards Matched to Your Credit Profile | Experian CreditMatch
How to Build Credit | Experian
4 Reasons Not to Get a Balance Transfer | Experian
Vital Card blog posts are intended for informational purposes only and should not be considered financial or any other type of advice.