If you’re carrying a balance on a high-interest credit card and are worried about high interest rates, you have options. Transferring your balance to a low-interest card shifts your financial obligation to the new card’s carrier and pays off the original card. A balance transfer doesn’t lower your debt, it simply moves it from one card to another and saves you the money you would have paid in interest. Many credit cards offer an introductory period of 0% APR that gives you the option to contribute interest-free payments to your principal balance, which allows you to pay your debt off faster.
The Introductory period can last anywhere from 6 to 18 months and will be detailed in the terms and conditions of your card. Consider an option with a long promotional period to give yourself the most time without interest to pay off the balance. Balance transfers are available for various loan types including:
- Credit card balances
- Student loans
- Personal loans
- Home equity loans
- Auto loans
How Does it Work?
The idea of a balance transfer is simple, although there are a few things that can catch you off guard if you don’t do your research.
1. Decide where you are transferring the balance
The first step in the process is comparing your options to find what best suits your needs. Will you be transferring to a card you already have or a new card you just opened that offers a low-interest promotional period? Balance transfers allow you to move to a card from a new issuer, not to a different card from the same issuer or any of its affiliates.
Don’t be instantly won over by the promise of a 0% interest start. Each card will have its own fees, rates, and requirements. Thoughtfully comparing the Schumer box of each of your options will set you up in the long run. Schumer boxes are standardized in format and font, meaning you’ll easily be able to compare what each card offers.
2. Assess the credit available
Next, you should take note of the credit limit offered for each of your options. Is there a limit to how much you can transfer? Does it line up with how much you want to transfer? The transfer limit does not always equal the credit limit. If your balance surpasses what is offered, you may only be able to move a part of your debt. It’s recommended that you start with the portion of debt that has the highest interest rate.
3. Understand the terms and fees of the new card
Once you have decided which card you plan to go with, make sure you’re familiar with its terms and conditions. You should know the exact length of the promotional period, what the interest rate will be after that time ends, and any fees associated with transferring. For example, some cards offer an interest-free period on the balances you transfer to the new card but not the new purchases you make with it. Meaning, anything you buy would be subject to the ongoing interest rate of the card.
4. Work towards paying off debt
After you’ve decided which option to go with, how much you want to transfer, and you’ve been approved, the only thing left is to pay off your balance. The promotional period associated with balance transfers is a great tool to help you reduce your debt quicker. However, if you’re unable to pay off your balance before the promotional period ends, you may be putting yourself at financial risk. Creating a realistic payment plan that you can stick to will help you find the most success. The perks can only take you so far. In the end, you still have to strategically pay off your debt and refrain from adding to it.
Advantages of Transferring
Lower interest rates and better terms
The most significant benefit of transferring your debt is the set promotional period of little to no interest payments. Your balance transfer is also an opportunity to choose a card that has better terms than your last card. It’s important to remember that taking advantage of new perks is not a reason to overspend. Waiting until you pay off your current balance and paying your bill in full for every month after is the only way to ensure you won’t fall back into debt.
Juggling multiple high-interest debts can be overwhelming. Thankfully, many options will allow you to transfer multiple balances to a single card. Which can save you money and make your finances easier to manage. Using a balance transfer not only snags a lower interest rate but also consolidates your bills into a more manageable format.
Things to Consider
Balance transfer fee
You’ll most likely pay a balance transfer fee to start. Often times it’s 2% to 5% of the amount you plan to transfer which is added to your balance. Add this fee to your overall calculations to make sure that a balance transfer will actually save you money over time. Some cards are available with no transfer fee, but you generally trade a shorter introductory period.
When your introductory period has ended, your interest rate will increase to the regular rate that was presented to you when you signed. Any remaining balance will be charged at the new interest rate, which is typically high. When you’re weighing the card options, make sure you pick one that has an interest rate that you can reasonably afford. While it’s everyone’s goal to stick to a rigorous payment plan, that doesn’t always happen and you can end up in more trouble than you started with new interest rates.
Things like missed payments or exceeding your credit maximum will result in the loss of your promotional period and you’ll be charged the ongoing APR from then on. If your payments are late by 60 days, some cards may even charge you a penalty rate.
How Will it Impact Your Credit Score?
You need a good or excellent credit score to even qualify for a balance transfer. While a balance transfer doesn’t directly impact your credit score, it does change your financial profile. When you apply for a new credit card, the company will do a hard inquiry to confirm that you are a good candidate. This inquiry will appear on your credit report, although it will only really negatively impact you if lenders see that you have multiple credit card inquiries within a short period of time. If you were to continue to open low-interest accounts while still maintaining a considerable amount of debt, you’ll seem more of a risk to lenders.
Your credit utilization score shows how much of your credit line is currently used. When you open a new card and transfer the existing debt to it, this will alter the ratio. If you stick to your financial plan and aggressively pay down debt, your utilization ratio will go down. Instinctually you may want to close the cards you transferred from, but don’t! Instead, leave them open with no balance to maximize your progress by keeping your available credit high.
Using a balance transfer to consolidate debt and pay it off quickly is a smart move if you know what you’re doing. But it can also lead you into further debt if you don’t plan your payments and fall into bad spending habits. Pay close attention to what each card is offering so nothing surprises you as you near the end of your promotional period. They won’t send you a notification when it has ended so it’s up to you to stay on top of it.