You may have received a balance transfer offer from your credit card company and wondered if that’s the right solution for you. As a credit cardholder, it’s important to understand what a balance transfer is and how it works before making any decisions.
A balance transfer is when you essentially pay off the balance of a credit card by transferring that debt to another credit card. This could be a new credit card or one of your existing credit cards with a lower interest rate. When transferring your balance to another card, you can only transfer an amount up to your credit limit on that card. For example, if your credit limit is $3,000 and you already have a balance on that card of $400, you could only transfer up to $2,600 from another credit card. Keep in mind, balance transfers typically come with a fee and will be at a rate higher than your purchase rate. Before transferring any debt, take a moment to read the details so you know what to expect.
Choosing the right balance transfer card.
Transferring your debt only makes sense if it’s saving you money. Research possible credit cards and pay attention to the following details:
- Balance transfer fee: Most cards charge 3-5% of the amount you’re transferring. For example, if the total balance being transferred is $2,500 and the new card charges a 5% balance transfer fee, it will cost you $125.
- Interest rate on transferred balances: Transferring your balance to a different card means you begin making payments with the new card’s balance transfer interest rate. It’s most beneficial to move your debt to a credit card with a lower rate or card offering 0% APR on the transferred balance.
- Length of promotion period: If the card does offer a promotion with a lower or 0% interest, pay attention to when that expires, as its when you’ll begin paying that interest rate on the transferred balance. It can be beneficial to take advantage of these promos assuming you plan to pay then transfer amount off before that period expires.
- The card’s purchase, balance transfer, and cash advance interest rates: It’s important to know the interest rate of the card after any promotional offer expires. If you typically carry a balance from month-to-month, finding a credit card with a lower rate could save you quite a bit of money in the long-run. Most often, the balance transfer and cash advance interest rates are higher than the standard purchase rate.
How it works.
To complete a balance transfer with any financial institution, you need your account information of the account you want to transfer the balance from and the amount you want to transfer. The issuer of the card you want to transfer your balance to can approve the full amount, or part of your request depending on your credit limit, etc.
Until you receive confirmation from your new card issuer, you should continue to make payments on your old account.
Will a balance transfer affect your credit?
A balance transfer can be a smart move and won’t affect your credit score directly. Moving your balance to a lower-rate credit card won’t reduce the total amount of money you owe, but can decrease the amount of interest you will pay over time and allow you to pay off your cards sooner.
Avoid applying for too many new cards. There isn’t a magic number to how many credit cards you should have since your score is determined by your overall credit profile. It’s important to keep balances compared to your credit line low and stay on top of your payments.
Transferring your balance can help you pay less in interest but it’s still transferring debt from one place to another; your debt won’t go away. While it’s a case-by-case situation, pay attention to the details outlined above to ensure a credit card transfer would be beneficial to your financial situation. The point of a balance transfer is to help pay off your debt more quickly and inexpensively. Take advantage of the money you’ve saved in interest to pay down your debt faster.
Related post: 7 Common Credit Card Mistakes to Avoid
Make the Smart Move
High-interest debt can cause financial strain.
Consolidate your high-rate balances to a low-rate GECU credit card and save on the amount of interest you'll pay.