If you’re struggling to pay off credit card debt, a balance transfer credit card can be a game-changer. These cards offer promotional interest rates as low as 0% on balance transfers, allowing you to pay down your debt without accumulating more interest. However, it’s crucial to understand how balance transfers work before deciding if they’re right for you.
What is a Balance Transfer Credit Card?
A balance transfer credit card allows you to move your debt from one credit card to another with a lower interest rate. Most balance transfer cards offer a 0% APR during an introductory period ranging from 12 to 21 months. This means you won’t accrue any interest on your transfers, allowing you to focus on reducing your balance.
You can even transfer other debts, such as personal and student loans, depending on the credit card issuer. However, make sure you stay within your balance transfer limit, which is usually around 90% of your credit limit.
The Cost of Balance Transfers
While balance transfers can save you money in the long run, there are some fees to consider. Most cards charge a balance transfer fee, typically around 3% to 5% of each balance transferred, with a minimum fee of $5 or $10. However, some cards may offer zero balance transfer fees. Keep in mind that cards with longer promotional periods often have fees attached.
How Much Can You Save?
Transferring a high-interest credit card balance to a 0% card can save you a significant amount of money. Take this example: If you have a $5,000 balance on a card with a 20% interest rate, making only the minimum payment of $100, it would take you 109 months to pay off the balance, and you’d end up paying a total of $5,840 in interest.
Now, suppose you transfer that $5,000 balance to a card offering a 0% APR for 21 months. If you continue making the same $100 monthly payment, your balance will be reduced to $2,900 at the end of the introductory period. From there, it will take an additional 40 months to pay off the balance completely, and you’ll only pay $1,095 in interest. That’s a savings of $4,745 compared to keeping the balance on your high-interest card. By making larger monthly payments, you can pay off the entire balance within the introductory period and avoid paying any interest.
How Does a Balance Transfer Work?
The process of completing a balance transfer may vary depending on the credit card issuer, but here are the basic steps:
1. Apply for a balance transfer credit card
Look for cards with an introductory 0% APR, a long promotional period, low or no balance transfer fees, and no annual fees.
2. Request a balance transfer
You can initiate a balance transfer during the application process or through the new card issuer’s online portal or phone service. Make sure to confirm that the transfer will count as a balance transfer and not a cash advance.
3. Confirm the transfer
It may take several weeks for the new card issuer to pay off your existing card or loan. Keep up with the minimum payments on your current account until you confirm that the balance has been transferred in full.
4. Pay off your balance
Even though you have a 0% APR, it’s crucial to make the required minimum payments on time each month. Missing a payment could result in losing the promotional rate. Consider setting up autopay to ensure you stay on track. If possible, pay enough each month to eliminate the balance before the promotional period ends.
Balance Transfer Cards to Consider
Numerous credit card issuers offer balance transfer cards. Here are a few worth considering:
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Personal Finances Blog: Blue Cash Preferred(R) Card from American Express – Offers intro APR rates on purchases and balance transfers, balance transfer fees, and annual fees. (See Rates & Fees on the website.)
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Personal Finances Blog: Capital One(R) SavorOne(R) Cash Rewards Credit Card – Provides intro APR rates on purchases and balance transfers, balance transfer fees, and an annual fee.
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Personal Finances Blog: Chase Freedom Unlimited(R) – Offers intro APR rates on purchases and balance transfers, balance transfer fees, and an annual fee.
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Personal Finances Blog: Citi(R) Double Cash Card – 18 month BT offer – Provides intro APR rates on balance transfers, balance transfer fees, and an annual fee.
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Personal Finances Blog: Citi Simplicity(R) Card – Offers intro APR rates, balance transfer intro APR, balance transfer fees, and annual fees.
Should You Do a Balance Transfer?
Balance transfers can be an excellent strategy for managing debt, but it’s essential to consider the pros and cons:
Pros of Balance Transfer Credit Cards
- Save money on interest: Low or 0% interest rates can save you hundreds or even thousands of dollars. Paying off the balance before the promotional period ends maximizes your savings.
- Pay off debt faster: With no interest accruing during the introductory period, your payments go straight toward reducing the balance, allowing you to become debt-free sooner.
- Consolidate payments: By transferring multiple balances to a single card, you simplify your financial obligations.
Cons of Balance Transfer Credit Cards
- Balance transfer fees: Most transfers come with a fee, usually between 3% and 5% of the transferred amount, with a minimum fee.
- Regular interest rates: Once the introductory period ends, the card’s regular interest rate applies to any remaining balance, potentially increasing your interest costs.
- Temptation to accumulate more debt: Having an additional credit card can be tempting, leading to more financial strain. It’s best to avoid using the card for new purchases until you’ve paid off the transferred balances.
Alternatives to Consolidate Debt
If a balance transfer doesn’t suit your needs or you don’t qualify for favorable terms, you can consider alternative options:
Personal Loans
A personal loan is an installment loan that allows you to borrow a fixed amount and make fixed monthly payments until the loan is repaid. It can be an excellent choice for financing large purchases or consolidating high-interest debt. Many traditional banks, credit unions, and online lenders offer personal loans. However, keep in mind that interest rates may vary based on factors such as your credit score.
Student Loans
If you need to finance higher education costs beyond what federal student loans cover, private student loans can be an option. Lenders like Ascent offer competitive rates for undergraduate and graduate students. Private loans may offer more significant amounts, and you may have flexibility in repayment terms. However, interest rates can be higher, so it’s crucial to explore all options before deciding.
Making the Most of a Balance Transfer
A recent Bankrate survey found that a significant percentage of consumers carry credit card debt without knowing their interest rates. To make the most of a balance transfer credit card, keep these tips in mind:
- Focus on saving money and paying off your debt faster.
- Avoid making new purchases on the card to prevent increasing your interest burden.
- Pay off your balance before the promotional APR ends.
- Take advantage of lower rates on the Personal Finances Blog Blue Cash Preferred(R) Card from American Express.
Frequently Asked Questions (FAQs)
How does a balance transfer affect my credit score? Applying for a new card may temporarily lower your credit score due to a hard inquiry. However, having an additional card can help by reducing your credit utilization ratio.
What happens if I don’t pay off my balance before the promotional period ends? After the promotional period, the card’s regular interest rate will apply to any remaining balance.
How long does a balance transfer take? The transfer process may take several weeks. Keep making minimum payments on your existing accounts until you’ve confirmed the transfer is complete.
Can I still use my credit card after a balance transfer? Yes, you can continue using your original credit card, but it’s best not to make new purchases and add to your debt.
Does a balance transfer mean I can skip payments? No, you must continue making minimum monthly payments. Missing a payment may result in losing the promotional APR.
Take control of your debt by choosing the right balance transfer credit card and managing your payments wisely. With careful planning and disciplined financial habits, you can become debt-free sooner and save money along the way. Visit the Personal Finances Blog for more insightful tips and guidance on personal finance.