A balance transfer is a transaction where you transfer the balance of one credit card to another, usually a different financial institution.
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What’s a balance transfer?
A balance transfer is a way for you to transfer your credit card balance from one card to another. Typically, it’s done by transferring the entire balance. However, you can transfer a portion of the balance if you’d like.
If you’ve found yourself in credit card debt, and are having a hard time making the minimum payments, you can benefit from a balance transfer.
When you do this type of credit card transaction, the purpose is to take your balance from a high-interest card to a lower-interest card to save money.
It’s also common to find promotions, such as 0% APR for 12 months, which gives you a year to pay down your entire balance, or as much as you can.
Some financial institutions charge balance transfer fees, which are commonly 3% or 5% of the balance that you’re transferring. Be sure to check with your specific credit card issuer, and see if you can find one that waives the fee.
Benefits of transferring your credit card balance
Credit card debt can be overwhelming, and it’s easy to get discouraged. According to Debt.org, the average American household has $8,398 in credit card debt. So, if you find yourself in debt and wanting to get out, know that you’re not alone.
The biggest and most important benefit is the ability to save money. When you’re making payments to high-interest credit cards, it’s overwhelming. However, finding a 0% APR promotion or a lower-interest credit card has the potential to save you a lot of money.
Although you’re moving debt from one place to another, the money you save from interest can help you pay off your debt sooner than you expected.
It’s also a great way to simplify and consolidate your credit card payments. If you have multiple credit cards with balances, consolidating all of them into one card can make your bills streamlined.
It’s easier to manage because you only have to think about one payment. This can also give you the motivation to pay it off faster because watching your balance decrease is inspiring.
Now that you know that it’s possible to save money by transferring your credit card balance to another. Let’s break down the numbers to see how much you can potentially save.
For example, if you wanted to pay your $5,000 credit card balance off in a year, at an annual percentage rate (APR) of 18%, you’d pay a total of $500 of interest and your monthly payment would be about $458.
If you transferred that same balance to a card offering 0% APR for 12 months and doesn’t charge fees, you wouldn’t pay any interest, and your monthly payment would be about $416.
With the money you’ll save on your monthly payment, you can build your savings account, invest, or pay off other debts.
If your goal is to get out of credit card debt and you have a plan to pay it off, then a balance transfer can help you achieve that goal.
However, before applying for a new card, make sure you consider the following:
- How long is the promotional rate period?
- Are there any up-front fees?
- What will the annual percentage rate be after the promotional period?
- What are the different interest rates that you may have to pay? Purchases, balance transfers, cash advances, and other transactions may have different rates.
- Is it possible to get a credit limit that’s high enough to where it makes sense to transfer your balance?
- How soon can you pay off your balance? If it’s within 6 months, it may not be worth getting a new credit card.
How to do a balance transfer
If you’ve decided that a balance transfer is the right option for you, take the following steps to complete one.
How to do a balance transfer:
- Choose a credit card.
Find a credit card that offers a promotional 0% APR for at least 12 months, and waives balance transfer fees.
- Gather your current balances and card details.
You’ll need the balances, account numbers, payment address, and lender phone number.
- Once you’re approved, decide on the amount, and request a balance transfer.
If everything sounds good and works for you, provide the balance transfer information to your new credit card company. It can take up to 10 business days, so continue paying your old card until you get confirmation that the transfer is complete.
- Follow your plan to payoff your credit card debt.
The most important thing is to stick to your plan and payoff your credit card debt.
Once you’ve transferred your debt, consider setting up automatic payments to ensure you don’t miss a payment. A common strategy is to set up automatic payments for the minimum payment, then manually add as much as you’d like.
If you find it easy to make purchases with your credit card and have a hard time stopping yourself, it may be worth keeping the credit cards out of sight until you pay your balance to zero.
What to do after paying off your credit cards
Once you’ve paid your entire balance, congratulations. Getting to this point is a big deal, and you’ll feel a weight lifted off of your chest. You’ll also be in a better financial situation.
So, what do you do next?
- Commit to staying out a credit card debt by paying your balance in full and on-time each billing cycle.
- Pay off other debts.
- Build your emergency fund.
- Invest towards your future.
After you’ve paid your balances to zero, commit to living abundantly. Create financial security by not going back into debt, and begin to save and invest.
Frequently asked questions
Generally, it takes 5 to 7 business days. However, some credit card issuers say that it can take up to 2 to 3 weeks.
The downsides of doing a balance transfer is that your utilization ratio for that card will be higher, and you’ll get a hard inquiry once you apply.
Unless your new credit card issuer says that in order to get approved, the old card needs to be closed after the transfer, then you can still use it.
Closing your old credit card is an option. However, it’s important to remember that closing a credit card can shorten your length of credit history, which is one of the factors that determine your credit score.
Balance transfers can be a helpful tool to get out of credit card debt. If you’re not careful, it can have the opposite effect. Take advantage of 0% APR offers and don’t pay balance transfer fees. Make a decision to stop overspending and follow a plan to pay off your debt as soon as you can.
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Featured image courtesy of Unsplash.
About David Em
David Em is the founder of More Money More Choices, which he launched to help you take control of your finances and build your dream life. Before More Money More Choices, David worked in leadership positions in the finance industry.