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Balance Transfers

How to do a balance transfer

Transferring your existing balance to a zero-interest credit card can help you pay off card debt faster and avoid paying extra interest

Summary

If you’re considering a balance transfer, start by checking your current balance and APR and understanding the terms, conditions and fees of the balance transfer offer. These tips will help you do a balance transfer successfully.

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Is your credit card debt piling up? Worried that high interest rates are causing that debt to grow faster than you can pay it down? A credit card balance transfer might be a solution.

In a balance transfer, you take the debt from one or more credit cards and transfer it to a different card. The goal is to move your debt from credit cards with high interest rates to one with a far lower rate. Ideally, you’ll transfer that debt to a card that offers 0% interest for a limited period.

See related: Best balance transfer credit cards

Benefits of doing a balance transfer

Transferring your existing debt to a card with a 0% introductory interest rate gives you an opportunity to pay it off without worrying about interest. If done properly, a balance transfer can help you take control of your credit card debt.

The challenge? There are plenty of potential pitfalls with balance transfers. Those 0% interest rates only last so long. Once they expire, your new card’s standard interest rate will kick in. And that rate could be somewhere in the range of around 20% or more. The debt you haven’t paid off? This higher rate will apply to that.

Mark Charnet, founder and CEO of American Prosperity Group in Pompton Plains, New Jersey, said too many consumers get so enamored with that 0% offer, they don’t think about what happens after the introductory period ends.

This might not be a big problem for those consumers who have a plan to pay off their transferred debt before the introductory offer ends. But those who fail to pay off their debt in time? They might be in for a shock when their new card’s interest rate jumps from 0% to 19%, Charnet said.

“That is the No. 1 problem with balance transfers,” Charnet said. “People don’t realize what happens after the introductory period expires. They don’t realize how fast the debt they haven’t paid off can grow once that higher rate kicks in.”

See related: Balance transfer survey: High fees, pricey APRs lurk behind promotions

Check your current balance and APR before starting a balance transfer

Before starting a balance transfer, it’s important to understand the extent of your debt. Gather the most recent statements of all your credit cards to determine the total balance of your credit card debt. Then look at the APR of your cards.

APR, which stands for annual percentage rate, is the price you pay to borrow money on your credit card. For credit cards, APR and interest rate are basically the same.

Maybe you have three credit cards, all with an APR of 18% or higher. It might make financial sense to transfer that debt to a credit card that offers either a lower APR or an introductory period in which it won’t charge you any interest on your existing debt.

See related: Balance transfer calculator

Pick a balance transfer card that works for you

Choosing the right balance transfer card depends on several variables.

  • First is the new interest rate. Ideally, you’d want to transfer your high-interest-rate debt to a card that offers 0% interest on balance transfers for a limited time.
  • The introductory offers with some credit cards last longer. If you have a lot of debt, you might pick a balance transfer card with a 0% offer that lasts 18 months instead of the more common 12 months.
  • If you are transferring a lot of existing credit card debt, you want a balance transfer card with a high credit limit. This way, you can transfer more or all of your existing debt to it.
  • Next, you should look out for balance transfer fees. These are typically 3% to 5% of the transferred amount. However, there are several credit cards with no balance transfer fee.
  • You should then look at the features that come with a balance transfer card. Some will offer rewards points or cash-back bonuses that could be valuable if you plan on making new purchases on the card. The debt you transfer to a new card, however, usually doesn’t earn rewards or cash-back bonuses.

See related: How to negotiate a balance transfer fee

Applying for a balance transfer card

Usually, consumers apply for a new credit card with an introductory interest rate of 0% on all new purchases and balance transfers. When applying, they also sign up for a balance transfer, providing information to the new card provider about their existing credit card debt. This means listing the credit cards from which they want to transfer their debt and the amount of debt they want to transfer.

If these requests are approved, the provider of the new credit card pays off the debt on consumers’ existing cards. That debt is then charged on their new card.

Those 0% introductory offers, though, come with a deadline. Often, they will expire after a set period of time that can go from six months to 21 months – a recent CreditCards.com recent survey found the most common balance transfer promotion offers cardholders 15 months to carry an old balance interest-free. After the intro period ends, the card’s standard interest rate kicks in. Card providers will tell you when you apply what this interest rate will be.

Balance transfers usually aren’t free. Most card providers will charge a fee, often in the range of 3% to 5% of the amount of money you’ve transferred. If you’re transferring $6,000 of credit card debt and the fee is 3%, you’ll pay $180 for that transfer, a figure that will be added to the balance of your new credit card.

Depending on the credit limit of your new card, you might not be able to transfer all your existing credit card debt. If your new card comes with a credit limit of $10,000 and you have $15,000 of credit card debt, you’ll only be able to transfer over a portion of your debt.

Finally, you won’t be able to transfer your debt between two cards issued by the same provider. For instance, you can’t close a balance transfer between one Chase Freedom card and a Chase Freedom Unlimited card even though both cards offer balance transfer promotions.

Possible drawbacks of a balance transfer

While balance transfers can be useful tools for controlling credit card debt, personal finance experts warn that consumers often misuse them.

The biggest mistake consumers make with balance transfers is not paying off the debt they transferred before the 0% introductory APR offer expires. Then, when their new credit card adjusts to its higher interest rate, their existing debt once again starts to grow quickly.

Others also make the mistake of adding new debt to the credit card they paid off with their balance transfer. Then, when the introductory offer expires, they’re 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 situation than they were in before they started their balance transfer.

“Now you are paying higher interest on the balance you transferred, and you are faced with new debt,” said Rahkim Sabree, owner of Unlimited Investment Solutions, a consulting business in the Hartford, Connecticut, area. “You have to change your frame of mind when you do a balance transfer. You can no longer live beyond your means.”

Fortunately, avoiding this mistake isn’t complicated. Justin Zeidman, manager of credit card products at Navy Federal Credit Union said the best move consumers can make before starting a balance transfer is to create a household budget showing their monthly expenses and income. Once they’ve done this, they can determine exactly how much they can devote each month to paying down their credit card debt.

Zeidman recommends that consumers set up an automated monthly withdrawal from their checking account for this amount to make sure they pay down their transferred debt at a rate that they can afford.

“Budgeting is important. Autopay is important, too. It’s a way to keep you honest with your payments,” Zeidman said. “Set it and forget it, and then watch your credit card debt decrease month by month.”

Charnet’s advice is simple: Once you transfer your debt from one credit card to another, stop using that first card. Don’t close the account: Doing so could hurt your credit utilization ratio and drop your credit score. Just don’t use it.

“People today don’t understand the concept of scissors, of cutting up that other credit card,” Charnet said. “Suddenly they see that they have all this credit available to them and they start to use it. It’s better to cut it up and forget about it.”

Understand the terms and conditions of your balance transfer

Sabree recommended that consumers always study the terms of a balance transfer offer before they initiate one. Not understanding these could prove costly, he said.

Some consumers might think that they always have at least 15 months to pay off the debt they’ve transferred before the 0% introductory offer expires. But that’s not always the case. Some cards might offer an introductory period of just six months. Consumers, then, might not put enough money on their debt to pay it off before the 0% period ends, Sabree said.

Others forget about the costs associated with balance transfers.

Zeidman said that these balance transfer fees can be costly. Say you are transferring $5,000 to a card that charges a transfer fee of 5%. That comes out to $250.

“Depending on how much you are transferring, taking a balance transfer offer with a lower interest rate of 1.99% for 12 months might save you money over taking a 0% offer that comes with a 4% fee,” Zeidman said. “Consumers have to do the math on this.”

How balance transfers affect your credit

Sabree also warned consumers that initiating a balance transfer could impact their credit scores.

Every time you apply for a new credit card, the provider of that card will check your credit. This is known as a hard inquiry, and each hard inquiry can cause your credit score to temporarily fall by five to 10 points, according to FICO.

Fortunately, this is only a temporary hit. If you pay your bills on time each month and cut down on your existing credit card debt, your credit score should quickly recover from this small dip.

Editorial Disclaimer

The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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