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What it Means to do a Balance Transfer
Last Updated: March 8, 2024
How to transfer a balance from another credit card
Disclaimer: We are not qualified legal or tax professionals and are not giving advice. Always speak with a qualified professional before making any legal or financial decisions.
Are you overwhelmed by high-interest credit card debt? You're not alone. With countless balance transfer offers flooding your mailbox and inbox, it's tempting to wonder if this could be your ticket to financial relief.
In this comprehensive guide, we'll clarify the balance transfer process, helping you understand what it means to transfer your balance, the potential benefits, and crucial considerations before making a move.
Whether it's slashing your interest payments or consolidating debt, let's explore if a balance transfer is the smart choice for your financial health.
Want to skip the article and speak directly to a debt specialist? Click here for a free consultation.
What is a Balance Transfer?
A balance transfer is a method that allows individuals to move their credit card debt onto a new card, often benefiting from an extremely low-interest rate, sometimes even a
zero percent APR, for a limited period.
Basically, a balance transfer is a credit card that allows you to move other credit card debt onto the balance transfer card at an extremely low interest rate for a limited amount of time.
Once that time period expires, you pay a much higher interest rate on the balance. In addition, there are often balance transfer fees, usually a percentage of the amount you are transferring.
What to Know BEFORE Doing a Balance Transfer
Before you make a balance transfer, there are several factors you need to know. Most of this information can be found in the fine print.
These include:
- Credit Score Requirements - Most balance transfer offers require good to excellent credit, around 690+ FICO. Some issuers may approve lower scores but charge higher interest rates. Check your credit first.
- Balance Transfer APR - When considering a balance transfer, it's important to compare the introductory APR—often set at 0%—with the standard APR rates that will apply after the initial period. Make sure you can pay off the balance within the promo period.
- Fees - Know the balance transfer fee, which generally ranges from 3-5% of the amount transferred. Also look for other fees like annual, foreign transaction, or late payment fees.
- The amount you can transfer - The transfer cannot exceed your new card's credit limit. Compare limits before applying.
- Payment allocation - Issuers apply payments to the lowest APR balance first. Understand how this works with an existing card balance.
- Things to watch out for - Promotional offers can change. Pay close attention to expiration dates for 0% APR periods. Set reminders if needed.
Once you have that information, you can compare your cards and see if the balance transfer card is a better deal than the one you now use. In addition to understanding the balance transfer fee, it's crucial to comprehend the implications of the APR on a credit card, as it dictates the interest you'll pay on the remaining balance.
Write down the information so you can compare apples to apples:
- Compare the fees on both cards, note the lowest
- Compare the APRs on both cards, note the lowest
- See if the purchase APR during the introductory period is lower than your existing card
- Compare what you need to transfer to what you are allowed to transfer
- Decide if you can pay off the transferred amount within the introductory time period
Now you can make an informed decision. Always read the fine print on both cards. Otherwise, you may end up with extra expenses.
The Math Behind Making a Balance Transfer
Let’s take a look at how much you can save (or spend) by completing a balance transfer.
| Original credit card | Balance transfer credit card | |
|---|---|---|
| Amount of debt | $10,000 | $10,000 |
| APR | 26.99% | 0% |
| Time to pay off | 15 months | 15 months |
| Balance transfer fee | Not applicable | 3.05% or $305 |
| Monthly payment | $793 | $687 |
| Annual fee | $0 | $0 |
| Total amount paid | $11,607 | $10,305 |
| Post-introductory APR | 26.99% | 15% |
In this example, you should definitely consider a balance transfer.
| Original credit card | Balance transfer credit card | Remaining amount on original credit card | |
|---|---|---|---|
| Amount of debt | $10,000 | $5,000 | $5,000 |
| APR | 15% | 0% | 15% |
| Time to pay off | 15 months | 15 months | 15 months |
| Balance transfer fee | Not applicable | 3.05% or $305 | Not applicable |
| Monthly payment | $735.26 | $333.33 | $367.63 |
| Annual fee | $50 | $0 | $50 |
| Total amount paid | $11,079 | $5,333.00 | $5,564 |
| Post-introductory APR | 15% | 26.99% | 15% |
In this example, you still have $5,000 remaining on your original credit card. You end up paying $10,897 for both cards to pay off your debt. This is roughly $200 in savings. You would also need to pay $700.96 a month for both cards to achieve your goal, a savings of $35.00 a month.
In this instance, the balance transfer may not be worth the effort. The other issue is that the post-introductory credit card APR is significantly higher with the balance transfer credit card.
Determine if a balance transfer makes sense
Here are two examples:
Worthwhile Transfer
- Original Credit Card APR: 26.99%
- Balance Transfer Credit Card APR: 0% for 15 months
- Balance to Transfer: $10,000
- Balance Transfer Fee: 3.05% or $305
- Monthly Payment: $687
- Total Interest Paid: $0
- Total Fees Paid: $305
Transfer with Minimal Savings
- Original Credit Card APR: 15%
- Balance Transfer Credit Card APR: 0% for 15 months (26.99% after)
- Original Credit Card Balance: $5,000
- Amount to Transfer: $5,000
- Balance Transfer Fee: 3.05% or $305
- Total Interest Paid: $0
- Total Fees Paid: $305
- Remaining Original Credit Card Balance: $5,000
- Total Interest on Original Card: $750
- Total Interest + Fees Paid: $1,055
If you were to use the balance transfer method, you would want to pay off the balance transfer card and then cut it up so that you do not use it to run up more debt. If getting the balance down quickly is preferred, the balance transfer may be a way to help you see quick success.
Pacific Debt, Inc offers a
debt calculator that may help you make an informed decision by resorting to the pencil and paper method!
Doing the Balance Transfer
Before you look for a balance transfer card, check your credit score and fix any errors - you want a credit score better than 670 for the best rates. You can learn more about that here
What is credit repair and why you need it?
Next, do your research and find the correct card. Next, apply for the card and apply all your attention to paying it down! And finally, set up a budget and review your spending so you don’t get into the same position again.
For more information on balance transfer cards, check out
How To Do A Credit Card Balance Transfer
Common Balance Transfer Mistakes to Avoid
When doing a balance transfer, watch out for these missteps:
- Transferring to a card with a higher regular APR than your current rate
- Running up more debt on the old card after the transfer
- Missing payments on the new card and losing the 0% APR early
- Not budgeting properly and paying off the full balance when the promo period ends
Alternatives to Balance Transfers
Other options beyond balance transfers include:
- Asking your current issuer for a hardship program or rate reduction
- Using a debt management program to negotiate lower interest rates
- Taking out a personal loan with fixed payments and rates
- Using DIY debt payoff strategies like the debt snowball or avalanche methods
Tips for Managing Payments After a Transfer
Once you complete a transfer, be sure to:
- Pay at least the minimum on time each month
- Create a budget to pay off the full balance during the promo period
- Avoid using the new card for purchases until the transferred balance is paid off
- Set up autopay for the monthly payments so you never miss one
- Contact the issuer early if you anticipate difficulty making payments
FAQs
Conclusion
A balance transfer credit card can be a great way to manage and eliminate debt. However, you must know and understand what you are applying for so that you do not end up in more debt. Used strategically, a balance transfer can help you consolidate debts, save money, and eliminate balances faster. But have a backup plan ready in case you can't pay off the full amount within the intro 0% APR timeframe.
Balance transfers should be just one tool in your overall debt reduction strategy, not a cure-all. Combine smart transfers with budgeting, additional payment strategies, and healthy financial habits for the best results. Take your time, do the math, and make certain that a balance transfer is the best option for you.
If you are struggling with overwhelming debt and want to explore your debt relief options, Pacific Debt Relief offers a free consultation to assess your financial situation. Our debt specialists can provide objective guidance relevant information and support to help find the right debt relief solution.
*Disclaimer: Pacific Debt Relief explicitly states that it is not a credit repair organization, and its program does not aim to improve individuals' credit scores. The information provided here is intended solely for educational purposes, aiding consumers in making informed decisions regarding credit and debt matters. The content herein does not constitute legal or financial advice. Pacific Debt Relief strongly advises individuals to seek the counsel of qualified professionals before undertaking any legal or financial actions.
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