July 11, 2019

How Do Balance Transfers Work

Read more about Balance Transfer

A balance transfer lets you consolidate your debt while saving money on interest. Here's everything you need to know about how they work and whether they're right for you.

What is a Balance Transfer?

Balance transfers move the balance of one debt to a credit card. Usually, people use them to transfer from one credit card to another. It's a way to combine your outstanding debt under one bill and interest rate.

Credit card balances, auto loans, student loans, personal loans, and other types of loans may all be eligible for balance transfers.

Balance transfers work best when you transfer a balance with a high interest rate to a card with a lower or even 0% rate.

If you had one credit card with a 14% APR and one with a 24% APR, you could transfer the 24% APR balance to the 14% APR card.

The actual transfer is not free. Many credit card companies charge fees for balance transfers between 3-5% of the transferred balance. For a transferred balance of $1,000, you might pay between $30 and $50 for the transfer.

Balance transfer credit cards are normal credit cards that provide benefits specifically for balance transfers. However, you can typically make a balance transfer with any type of credit card.

Some cards offer a 0% introductory rate specifically for balance transfers. Introductory rates typically last between 6 and 24 months after opening the account.

Reasons to Use a Balance Transfer

Save Money on Interest Payments
By moving your balance to a card with a lower rate, you'll accrue less interest. That means paying less overall.

Pay Down Debt Faster
Lower interest also means more of your payment goes directly to reducing your principle balance.

Consolidate Your Debt
Instead of making multiple payments toward several credit accounts, you can pay one monthly bill. This makes it easier to keep track of all your debt.

With some 0% APR balance transfer credit cards, the 0% rate only applies to the transferred balance. Any new credits charged to the card will still accrue interest every month. Check with your credit card issuer for the terms of your card.

Do I Qualify for a Balance Transfer Credit Card?

To complete a balance transfer, you need available credit. If you have one maxed-out credit, there's no available credit to transfer a balance to. You increase your credit by applying for a new card.

A FICO credit score over 670 is considered "good" credit and will likely qualify you for a balance transfer credit card. Cards requiring higher credit scores often have longer 0% APR periods.

Applying for new credit requires a "hard credit inquiry" on your credit score. Hard credit inquiries make a small ding in your credit score. If you have had more than two in the past six months, you're less likely to be approved for a new card.

Keep reading to learn how exactly to make a balance transfer.

Before applying, check the likelihood of approval with a pre-qualification check. But remember, pre-qualification requests do not guarantee approval, and you still need to send in a complete application.

How Do I Make a Balance Transfer?

Follow these steps to get started:

  1. Decide Where You Will Transfer the Balance
    You have two options for transferring a balance: a new or existing credit card. For existing cards, use the one with a lower APR.

    To help you decide, look at the APR and credit limits of your transfer options. The APR of the card you transfer to should be lower than the interest rate of the debt you are transferring.

    You also need enough credit to accept the balance. To calculate this, take the following steps:

    • Find the credit limit of the card taking the transfer. You can find this on the card's statement.

    • Add any existing balance (if it's a new card, it is zero) to the potential transferred balance.

    • Divide the result by the credit limit (the number you started with).

    Say you have a card with a $10,000 credit limit and a $1,000 existing balance.

    You're looking to transfer a $5,000 balance, so add $1,000 and $5,000 to get $6,000.

    Divide $6,000 by the credit limit of $10,000, getting 0.6, or 60%. 60% is your total credit utilization.

    If the result is greater than 1, as in 100%, then you do not have enough credit to accept the balance. In the example above, you have enough room in your credit limit to fully transfer the balance.

  2. Understand the Terms and Fees
    You don't want to get stuck with unknown fees after a balance transfer. When choosing a balance transfer credit card, here is what you should look for:

    • Balance Transfer Fees
      The amount of money you will pay to make the balance transfer. Most credit cards charge 2-5% of the total amount being transferred.

    • APR for Transferred Balance
      Before you open a new card, ask the credit card issuer about the APR for the transferred balance and how long it will last.

      For a new card, this can be found in the marketing materials. For an existing card, check the monthly statement or call your credit card issuer.

    • APR for New Purchases
      On a balance transfer credit card, sometimes the 0% APR rate only applies to the transferred balance. Check what the APR will be for existing purchases to avoid racking up interest debt on new charges.

    • APR After Introductory Rate Ends
      Once the 0% rate ends, know what APR you will be charged if you haven't paid down the balance. Some cards will retroactively charge you interest for any remaining balance not paid by the introductory rate end date. This could mean paying even more in interest than you were before the transfer.

      The best way to avoid a surprise APR rate is paying down your balance in full before the introductory period ends.

    • Decide How Much to Transfer
      You can choose to transfer the entire balance or a partial amount. Depending on your credit limit constraints, it could be best to transfer only a portion of the balance.

      Even if a card has a large enough credit limit to accept the full balance you'd like to transfer, your credit score could be damaged if you transfer too much. You should aim to keep a card's total outstanding balance at less than 30% of the total credit limit.

      Some cards also limit the size of balance transfers. Check with your credit card issuer before confirming the transfer.

      You should also calculate the total fee for transferring. If the cost will be larger than the interest rate savings, the transfer might not save you money at all.

      You can only transfer balances between different banks. For example, you can't transfer the balance of one Chase credit card or personal loan to another Chase credit card.

    • Process the Transfer
      Log into the account of the card receiving the transferred balance. On the online portal, find the option to transfer a balance and enter the amount. You can also call your credit card issuer to make the transfer by phone.

      Once confirmed, the balances on both cards should update in about seven business days.

      If you opened a new credit for your balance transfer, you typically have a set period within which to transfer the balance. The typical amount is 60 to 90 days, but check your card's specific terms.

    • Make a Payment Plan
      Balance transfers aren't quick fixes. After your balance transfer occurs, you still need to pay off the outstanding balance. Set up monthly automatic payments to help you pay off your outstanding balance during the introductory rate period.

      While you work towards paying down your debt, stop using your credit cards for new purchases. Keep the old card's account open, but don't use it. With the new card, do your best to not add any new charges to the existing balance.

How to Apply for a Balance Transfer Credit Card

To apply for a balance transfer credit card, submit an application online or on the phone. You will need the following information for your application:

  • Account holder's name (i.e., the bank where you have the account)

  • Creditor name (i.e., you)

  • Type of debt (credit card, personal loan, etc.)

  • Account number of the balance you are transferring

  • Transfer amount

By putting your balance transfer information on your application, the balance transfer will be transferred automatically.

If you don't do this, you still have a window after opening the account to request the balance transfer. Typically, that period is between 60 and 90 days. Check with your credit card issuer for how long the time period will last.

Balance transfer requests are subject to your assigned credit limit. If you requested a $6,000 balance transfer but the credit card issuer only gave you a $5,000 credit limit, a $1,000 balance will remain on the old card.

What Happens Once I'm Approved?

Application approval depends on your credit score. If the lender deems you creditworthy, you'll receive a new credit card in the mail and be assigned a credit limit.

The balance you requested will be transferred to the new card. On your first monthly statement, you'll see the total outstanding balance and your APR.

Even if your new card has a 0% APR for new purchases, avoid placing charges on the new card. Focus on paying off the transferred balance first. You want to be sure you pay it off before the introductory period ends.

What Happens to My Old Credit Card?
If you only transferred part of your debt balance, the old credit card will still require monthly payments. You need to continue paying off the balance, plus any interest, every month until the outstanding balance is zero.

Once you pay off the outstanding balance, don't cancel the card account. Keeping accounts open for a longer period lengthens your credit history, which benefits your credit score.

Will a Balance Transfer Impact My Credit Score?

A balance transfer should only help your credit score IF it helps you pay down your debt faster. Here are some positive and negative ways a balance transfer might affect your credit score.

Positive

  1. If you find a balance transfer credit card with a limit about four times higher than the balance you will transfer, you'll keep your credit utilization ratio below 30%. This can improve your credit score.

    That means that if you need to transfer a $1,000 balance, a card with a credit limit of $4,000 keeps you below the 30% utilization.

  2. Whenever you open a new credit account, you are increasing your total available credit. Having a large amount of credit available benefits your score. But opening a new account can also hurt your scoreā€¦more on that below.

Negative

  1. Applying for a new card requires a hard inquiry into your credit history. This may lower your score by a few points. Luckily, credit agencies view inquiries made within a two-week period as one inquiry, so keep multiple applications within the same two weeks. The slight drop should go away after a couple months.

    Pre-qualification requests only requires a soft inquiry and does not damage your credit score.

  2. Opening new accounts brings down the average length of your credit accounts, which hurts your score. Avoid this by keeping the old account open, even if you don't use it. It will benefit your credit score by making your average credit account length higher.

Making regular debt payments on time is one of the best ways to maintain a healthy credit score. Do this and you'll be in good shape.

There are a couple reasons why you should or shouldn't do a balance transfer.

You should do a balance transfer if:

  • You currently have high interest debt.

  • You'd like to consolidate your debt.

  • Your credit score qualifies you for a balance transfer credit card with a 0% introductory rate.

  • You have a payment plan.

  • You understand the fees involved.

  • You understand the terms of the balance transfer

You should NOT do a balance transfer if:

  • Your credit score does not qualify for a favorable balance transfer card.

  • You already have a low interest rate on your current credit card.

  • You are unsure if you will be able to pay off the transferred balance before the introductory APR period ends.

If a balance transfer is not the right fit, consider taking a personal loan to pay off your high interest debt. Personal loans offer fixed interest rates - compared to credit cards, which are adjustable-rate - and have longer durations. A fixed-rate personal loan might offer better rates than your current credit card.

When making a balance transfer, plan for how you will pay off the balance once it is transferred. Read your credit card statements carefully and understand how long the introductory APR lasts, the balance transfer fees, and what the APR will be once the introductory rate ends.

Mark on your calendar when the introductory APR rate ends and assess how close you are to paying off the balance two months before.

If you won't pay it off in that time, you could apply for another favorable balance transfer credit card and do the process over again. However, that's not a long-term solution. The longer you stay in the debt, the longer you are limiting yourself financially.

Bottom Line

Balance transfers work when you use the favorable terms to save on interest and use that money to pay down your credit card debt. If you continue making minimum payments after a balance transfer, you won't save money.

Think of balance transfers as a way to get a temporary reprieve from paying interest. If you can take advantage of it, a balance transfer can help you reduce debt and save money.

More from CreditDonkey:

How to Pay Off Credit Cards

How to Pay Off Credit Cards


Credit Cards with No Balance Transfer Fee


Balance Transfer Calculator

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