How Credit Card Balance Transfers Work
Credit card debt got you feeling like you’re stuck at the base of a seemingly insurmountable mountain? Well, just like a proper climbing rope can do wonders, the right balance transfer credit card could be the tool you need to scale your way to debt-free living. But what are balance transfers on credit cards?
Here’s how credit card balance transfers work. By transferring the debt accrued on your traditional credit card to a credit card specifically designed to help you lower your bill, you can reduce the interest owed on credit card debt or even defer interest charges entirely for a short time. Credit union balance transfer credit cards are particularly helpful in giving you a chance to pay down discouraging balances. Like an adept wilderness expert, your local credit union can help you find your footing as you reduce your debt.
Balance Transfers on Credit Cards
Credit card balance transfers are designed to give consumers some breathing room on outstanding credit card balances by stopping runaway debt growth. The average credit card interest rate is over 20%, while the average household credit card debt is $5,315. If you don’t pay your credit card bills in full each payment cycle, interest fees continually accumulate. In fact, it’s possible to end up paying more each month toward your credit card’s interest fees than the original balance on your purchases — particularly if you have a history of making minimum or low monthly payments.
Initiating a credit card balance transfer lets you keep your line of credit open, giving you a safety net against emergencies, and helps you build up your credit score instead of tearing it down.
What is a Balance Transfer Credit Card?
A balance transfer credit card is a credit card designed to meet the needs of consumers who carry credit card debt. You can use it like any other credit card, but it has a special feature; you can transfer balances from other credit cards that are at their credit limit or carry an unfavorably high-interest rate.
With a balance transfer credit card, you're simply transferring your owed balance from one or more cards to a new credit card. The new card will likely offer a lower interest rate or even a promotional zero-interest period to give you a shot at paying off the whole balance before incurring more fees.
How Credit Card Balance Transfers Work
The credit card balance transfer process is fairly straightforward. There are four steps to completing a credit card balance transfer:
1. Apply for a credit card
You'll need to apply for a new credit card specifically designed to manage higher balances, like credit union balance transfer credit cards. Pay attention to the terms of the card because not all credit cards have a balance transfer option. Additionally, read the fine print to ensure you won't be transferring your balance only to be hit with hefty fees that cost more than just paying off the original card balance.
2. Initiate the balance transfer
Depending on your new card issuer, you can request your balance transfer online or over the phone. Make sure to have both credit cards handy to enter all the requested information. You might also be asked for identity verification information, such as the address tied to the cards and the last four digits of your Social Security number.
3. Wait for the transfer to go through
It can take anywhere from a few days to a couple of weeks for your transfer to be approved. Make sure you keep making regular payments on your original card until the transfer is complete. You want to avoid new charges piling up and adding to your debt while waiting for the balance transfer to go through.
4. Pay down the balance
Your new credit card will typically have one of two options, which are disclosed in your credit card agreement letter. Either you will have a lower interest rate, with payments at the new rate beginning soon after the transfer, or you might have a 0% APR promotional period, which means you won't pay any interest at all for a specified time. Every payment you make will go directly to reducing your outstanding balance.
What to Look for in a Balance Transfer Card
When choosing a balance transfer credit card, start by ensuring that the credit limit on your balance transfer credit card is large enough to cover your existing credit card balance. Next, you'll want to compare interest rates and how long they last, as well as balance transfer fees. Fortunately, many credit union balance transfer credit cards have no transfer fees!
If you have multiple high-balance cards, you may find a balance transfer card that allows you to transfer balances from several high-interest cards onto a single, smaller card, consolidating your debt and reducing your overall monthly payments.
In general, there are two types of balance transfer credit cards:
1. Low-interest rate balance transfer credit cards
Naturally, transferring your balance from a credit card that is charging you 29% to one that is charging you 18% will save you money. So even if you keep making the same payment you did on your old credit card, you can pay off your debt months or even years sooner than planned.
2. Low or 0% APR promotional period balance transfer credit cards
Some cards offer either a very low rate or a 0% APR for a specific time to give you time to pay down your balance. This promotional period generally maxes out at about 12-18 months. Often, you can expect a balance transfer fee totaling 3% to 5% of the transferred balance to be added to your total principal.
Pros of Credit Card Balance Transfers
The most significant benefit of credit card balance transfers is that they can help you minimize the amount of money you will ultimately need to pay off your credit card debt. In addition, if you're consolidating balances from several credit cards onto a new one, you may also be able to lower your monthly bills burden and simplify the payment process.
Opening a new credit card and transferring the balance can also positively affect your credit report. First, the old credit card will show it's paid in full. Second, you'll increase your debt-to-open-credit ratio, meaning that you'll have some credit open instead of being at or near your total credit limit. Both of these factors can help raise your credit score.
Cons of Credit Card Balance Transfers
It's possible that credit card balance transfers can do more harm than good if you don't use them responsibly. For example, switching your balance to a new credit card with a lower interest rate and a lower payment could mean you end up paying more before you pay it all off. Choosing a card with a low promotional rate or 0% APR but a high balance transfer fee could leave you with the same result.
Another possible downside of credit card balance transfers is they could disrupt the process of buying a house or leasing a car. This is because opening a new credit card can negatively impact your credit score. So, think twice about making this move immediately before you intend to make a big purchase that will run a credit check.
Further Resources on Credit Card Balance Transfers
There are a few more things to understand about credit cards and balance transfers before you choose your new credit card:
- Know your legal rights. By law, promotional periods must last at least six months on low-rate or 0% APR balance transfer credit cards. The issuer must also inform you in advance of what the rate will be after the promotional period is over.
- Check the calendar. Credit card companies are not obligated to remind you when a balance transfer credit card’s promotional period ends. So, make sure you keep track so you don’t get hit with surprise interest charges.
- Change card issuers. You typically can’t transfer balances between credit cards from the same issuer. Remember this when you’re looking for balance transfer credit cards, and choose one from a new issuer.
Don’t Travel the Credit Card Path Alone
On the journey to greater financial freedom, making the wrong choice when choosing a balance transfer credit card can mean paying even more than you would have originally for your credit card debt. On the other hand, making the right choices could lead to hundreds or thousands of dollars in savings.
The key to making a balance transfer credit card work for you is researching and picking the card that gives you the fastest, cheapest way to pay off your credit card debt. Credit union balance transfer credit cards are designed to help you do just that. Find a credit union near you with our convenient Credit Union Locator Tool.