Is your credit card debt piling up? Are you worried that high interest rates are causing this debt to grow faster than you can pay it off? Credit card balance transfer can be a solution.
When you make a balance transfer, you take a debt from one or more credit cards and transfer it to another card. The goal is to shift your debt from credit cards with high interest rates to a card with a much lower rate. Ideally, you will transfer this debt to a card that offers 0% APR for a limited period of time.
1. Check your current balance and annual interest rate.
Before you start transferring the balance, it is important to understand the amount of your debt. Check most credit card statements to determine your total debt, and then look at the annual interest rates on your cards.
The Annual Percentage Rate (APR) is the price you pay for borrowing money with a credit card. The APR and interest rate on credit cards are basically the same.
Maybe you have three credit cards, all with an annual interest rate of 18% or higher. It may make financial sense to transfer this debt to a credit card that offers either a lower annual interest rate or an initial period during which you will not be charged any interest on your existing debt.
To find out how much money you could save with the highest balance transfer card, use the Creditcards.com balance transfer calculator.
2. Choose the balance transfer card that suits you
Choosing the right credit card for balance transfer depends on several variables.
- First, the new interest rate. Ideally, you’d like to transfer your high-interest debt to a card that offers 0% interest on balance transfers for a limited time.
- Introductory offers with some credit cards last longer. If you have a lot of debt, you can opt for a balance transfer card with a 0% offer that lasts 18 months instead of the more common 12 months.
- If you are transferring the majority of your existing credit card debt, choose a balance transfer card with a high credit limit. Thus, you can transfer most or all of your existing debt to it.
- Pay attention to the commission for transferring the balance. Usually it is from 3% to 5% of the transfer amount. However, there are several credit cards with no balance transfer fees.
- Check out the features that come with the card. Some of them offer reward points or cashback bonuses, which can be useful if you plan to make new purchases. However, the debt you transfer to a new card usually does not earn rewards or cashback bonuses.
Typically, consumers apply for a new credit card with an initial 0% interest rate on all new purchases and balance transfers. When applying, they also sign up for a balance transfer, providing the new card provider with information about their existing credit card debt. This means listing the credit cards they want to transfer their debt from and the amount of debt they want to transfer.
Be aware that initiating a balance transfer may affect your credit score. Every time you apply for a new credit card, the card provider will check your credit. This is known as a hard request, and each hard request can result in a temporary drop in your credit score of 5-10 points, according to FICO. Fortunately, this is only a temporary blow. If you pay your bills on time every month and reduce your existing credit card debt, your credit score should bounce back quickly after that small dip.
3. Read the terms for transferring your balance
Rakim Sabry, financial educator and author of Financially Irresponsible, recommends that consumers always read the terms of a balance transfer offer before they initiate one. He said that not understanding this could be costly.
Some consumers may think that they always have at least 15 months to pay off the debt they transferred before the 0% introductory offer expires. But it is not always the case. Some cards may offer an introductory period of as little as six months. So consumers may not put enough money into paying off their debt to pay it off before the end of the 0% period, Sabri said.
Others forget about the costs associated with transferring the balance.
Justin Zeidman, assistant vice president of open banking at the Federal Navy Credit Union, said these balance transfer fees can be costly. Let’s say you transfer $5,000 to a credit card that charges a 5% transfer fee. The total transfer fee is $250.
“Depending on how much you transfer, a balance transfer offer with a lower interest rate of 1.99% for 12 months can save you money compared to a 0% offer that comes with a 4% fee,” Zeidman said. “Consumers have to do the math about this,” he said.
4. Transfer balance to a new card
If these requests are approved, the new credit card provider will pay off consumer’s existing cards. This debt is then charged to their new balance transfer card.
As noted, most card providers charge a fee, often in the range of 3% to 5% of the transfer amount. If you transfer $6,000 of credit card debt and the fee is 3%, you will pay $180 for that transfer, a figure that will be added to your new credit card balance.
Depending on the credit limit of your new card, you may not be able to transfer all of your existing credit card debt. If your new card has a $10,000 credit limit and you have $15,000 in credit card debt, you will only be able to transfer a portion of your debt.
Finally, you will not be able to transfer your debt between two cards issued by the same provider. For example, you cannot complete a balance transfer between a Citi® Double Cash Card and a Citi® Diamond Preferred® Card, even if both cards offer balance transfer promotions.
5. Pay off your balance before the end of the 0% APR period.
While balance transfers can be useful tools for managing credit card debt, personal finance experts warn that they are often misused by consumers.
The biggest mistake consumers make when transferring a balance is not paying off the debt they transferred before the initial 0% APR offer expires. Then, as their new credit card adjusts to the higher interest rate, their existing debt begins to mount rapidly again.
Others also make the mistake of adding new debt to a credit card they paid off in a balance transfer. Then, when the introductory offer expires, they are left with a portion of their old debt and new debt, all at high interest rates. These cardholders are now in an even worse financial position than they were before they started transferring their balance.
“Now you’re paying higher interest on the balance you transferred, and you’re facing new debt,” Sabri said. “You have to change your thinking when you make a balance transfer. You can no longer live beyond your means,” he said.
Fortunately, avoiding this mistake is easy. Zeidman said the best step consumers can take before starting a balance transfer is to create a family budget showing their monthly expenses and income. By doing this, they will be able to determine exactly how much they can set aside each month to pay off their credit card debt.
Zeidman recommends that consumers set up automatic monthly withdrawals from their checking accounts for this amount to ensure they pay off their transferred debt at a rate they can afford.
“Budgeting is important. Autopay is also important. This is a way to keep your payments honest,” Zeidman said. “Set it and forget it, then watch your credit card debt go down month after month,” he said.
How to transfer balance with major credit card issuers
Balance transfer processes and policies may vary between large issuers. Learn more to find out how each credit card company handles balance transfers.
bottom line
Transferring existing debt to a card with an initial interest rate of 0% gives you the opportunity to pay it off without worrying about interest for a limited time. If you do it right, a balance transfer can help you get credit card debt under control.
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