Balance Transfer: What You Need to Know

Since interest rates on credit cards can be as high as 30%, a balance transfer credit card is a great option for refinancing your current credit card debt. You can avoid rising interest rates right away and give yourself repayment flexibility by transferring your balance to a 0% APR card. Let's learn more about this feature and understand the pitfalls.

Understanding Balance Transfers and Why You Need It

The term “balance transfer” hides such an interesting procedure as transferring your debt from one credit card (or even from several) to another, which has more favorable conditions: low-interest rates, preferential service rates, or an extended repayment period. How does a balance transfer work? Banks usually charge interest on the accepted debt only a few months after the transfer to encourage this service. They resort to debt transfer to reduce the overall debt burden so that they pay less money to the bank every month.

Balance transfer can defer an old loan when you have new significant expenses. If, for example, in the coming months, you are going to go on vacation or do some minor repairs, and loan payments “eat up” half of your salary, then by transferring the high-interest debt to another bank, you can forget about interest for a couple of months. Payments will become noticeably smaller, and you will have money left over for planned expenses.

In addition to direct savings, you can resort to debt transfer for basic convenience. For example, you can collect two or three small debts from several credit cards onto one card with a much larger limit. This will give you a single payment date for your monthly loan payment and one place to do it.

Why Do Banks Offer Credit Card Balance Transfers?

When the competition in the credit card market becomes too intense, and banks no longer have enough people without credit cards, they begin to draw a new customer base from credit card holders of other banks.

To attract such “experienced” clients, bankers must offer them special conditions. That is why the interest on the amount of transferred debt is often noticeably lower than the standard rate of the same bank, and the first deadline for paying interest on such a loan is generally shifted by several months. 

In addition, such credit transfers may offer various bonuses, points, and prizes. This is the situation when not the clients bow to the bank, but the bank throws itself at our feet with its offer, which you should use with confidence.

How to Execute a Balance Transfer: A Step-By-Step Guide

Now you know the answer to “How do balance transfers work?” so you can understand in more detail how to carry out this procedure. Follow our list to turn this feature into a real money-saver.

Choose the Right Card

To make balance transfers on credit cards profitable, you need to make calculations. Obviously, the first thing you look at is the percentage difference and the length of the grace period. For example, it's a good deal if a new card offers 0% interest for the first 12 months, and you can pay off your debt in that time. If you plan to pay off the debt over a more extended period, consider the regular interest charged after the grace period.

Calculate the Commission

What is a credit card balance transfer commission? Typically, banks charge an additional one-time fee of 3% or 5% of the debt amount. There may also be a mandatory minimum commission of $5 or $10. This is a small amount, but it can make a difference if you are transferring a small debt, such as $50 or $100.

The only sure way to avoid balance transfer fees is to look for balance transfer cards that have waived fees entirely. You can also find cards with zero balance transfer fees. Remember that the $0 transfer fee may only be available for a limited period, so read carefully to determine when you must request a balance transfer for the offer to be valid. This window is usually in the first few months after receiving the card.

Apply for the Card

As soon as you figure out how a credit card balance transfer works and find the best conditions, you need to get a card from the selected bank. This can be done online or during a personal visit to the bank. Please note that balance transfers are only possible to cards from other banks, so issuing a new card from your bank is useless.

Initiate Transfer

You can start the transfer online or by calling your bank. Usually, the transfer process does not exceed two weeks, and soon, you will see your debt on a new card. In any case, you can always check the status of your application by contacting the bank's customer support.

Pay off the Debt

This point may seem obvious, but it should not be forgotten, as it is not enough to learn how to transfer a credit card balance. You still need to pay systematically without violating the deadlines. Failure to comply will negatively impact your credit score and limit your options in the future.

Final Thought

Many people have debts. Luckily, some solutions can reduce your credit load, including balance transfer credit cards and debt consolidation. Spend time researching your alternatives to determine which will work best for you. Paying a balance transfer fee to use one of the credit cards with lower interest charges can be a decent option, but you need to do the math to ensure this card transaction is profitable. 

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