One of the common ways to manage multiple credit cards and pay off debt quickly is by doing a credit card balance transfer. Are you wondering, “How do balance transfers on credit cards work?” or “What is a balance transfer?” Find out more here!
How do credit card balance transfers work? A balance transfer is when you move your balances from one or multiple credit cards to another card.
The new card offers a much lower interest rate, usually for a fixed period. Typically, you’ll find balance transfer offers advertised at a 0% introductory interest rate.
So, how do balance transfers on credit cards work to help you pay off debt? Well, a balance transfer can help you with saving money interest-free while paying off your credit card debt.
But it’s also a huge trap people fall into! This is because credit card companies offer balance transfers and the associated incentives as a way to make money.
How do balance transfers on credit cards work with credit card companies?
Balance transfers seem like one of the advantages of using credit, right?
However, some people may not pay off their transfer balances before their introductory rate expires. That allows the credit card companies to charge interest based on the agreement you made with them.
This is because, after the introductory period, the interest rate on your balances can be much higher than the 0% you paid before. These details can be pretty easy to glaze over.
The psychology of credit card balance transfers
The biggest reason people may not pay off even the best balance transfer credit cards? Because they get comfortable seeing the “new” lower interest rate, and they think they now have more time to pay.
I can’t tell you how many people I’ve spoken to who slow down on their debt repayment because they think a balance transfer is saving them money. Yes, you might have a lower interest rate but it’s still compounding on your debt. This means even though your interest rate is lower, if you slow down paying your debt or extend the time to pay it, you might actually not be saving anything in the long run!
In addition, many people end up increasing their balances through new spending. They think that, now that they’ve reduced their interest, the debt will be much easier to pay off.
How to do a credit card balance transfer the right way
It’s important to know the details of the card you are considering and how to transfer your balance correctly. Check out how to do a transfer!
1. Create a payoff plan
What is a balance transfer good for if it doesn’t help you pay off debt?
In other words, you need to make sure you can pay off your balance in full before the introductory period expires. Have you calculated how much you’d need for your monthly payments to pay off your balance in full by the expiration date?
You may run your calculations and find that you can’t pay your balance off in full before the introductory period ends. It might actually cost you more money in the long term if you make that balance transfer.
Create a debt reduction strategy and payoff plan to ensure you know exactly how much money you need and how long it will take to pay off your balance. Also, keep in mind that you usually can’t use a balance transfer to pay off your student loans.
2. Be aware of the balance transfer fees
Another question to consider is, “How do credit card balance transfers work as far as fees?” Many balance transfer agreements require you to pay a percentage of your balance as a processing fee. It will usually be anywhere from 3% – 5%.
So it’s important to ask yourself whether the fee is worthwhile (will you still save money?). If you choose to do a balance transfer, look for a card with no fees for the transfer and no annual fees.
In addition, in my opinion, it should have a 0% introductory period of at least 12 months (in which time you can work to pay off your balance).
3. Check your credit score before you apply
The most important thing to do before applying for a new card is to check your credit score and credit report. To qualify for the 0% annual percentage rate (APR), you will need to have a good or an excellent credit score. Otherwise, you may get declined.
Checking your credit score first will save you from applying for no reason. Improving your credit score can help you qualify for loans with better interest rates, saving you a lot of money!
4. Request a credit card transfer
Once you’ve decided that you want to go ahead with the credit transfers, you’ll need to send in an application to the credit card issuers. Often, a new credit card application will include the transfer request as an option.
You can also do this online or on the phone.
Before making any changes, read the fine print with the new card you are applying for.
5. Wait for the transfer to complete
Once you’ve submitted your application and requested a balance transfer, you’ll need to wait for the operation to complete. The time it takes for the balance to transfer will depend on the credit card company. Don’t forget to continue paying your balances in the meantime.
In most cases, it takes five to seven business days, but it can take several weeks to complete.
6. Do not continue to charge purchases
Just because your new credit card has a 0% APR doesn’t mean it’s time to hit the mall. Charging up purchases only adds to your debt, so it’s important to stop buying. It can also prevent you from paying off the balance before the introductory rate matures.
What is a balance transfer good for if you add more debt to your cards? Use this card for exactly what it’s for—to save you money on high interest and get out of debt for good!
Expert tip: Beware of interest rates
Balance transfers on credit cards work by offering promotional interest rates. When applying for a balance transfer, carefully consider the duration of any promotional interest rates offered.
While a 0% APR offer is enticing, I suggest having a plan in place to pay off the balance before the promotional period expires.
By creating a realistic repayment schedule and sticking to it, you can take full advantage of the promotional rate without getting caught off guard by higher interest charges once the promotional period ends.
Remember, the point of a balance transfer is to lower your debt, not get into more debt!
Alternatives to a credit card balance transfer
If you’ve decided a balance transfer isn’t financially beneficial, or you can’t qualify for a 0% APR, there are alternatives to a credit card balance transfer.
Pay off your balance in full on your current card
Remember, the credit card companies are not doing you any favors! Offering balance transfers is a strategy they use to make the maximum amount of money possible on interest. And for the most part, they always win.
If you feel like doing a balance transfer will be more trouble than it’s worth, don’t do it. The short-term gratification of a 0% interest rate that will inevitably lead to you paying more interest over time is not worth it if you won’t be paying off your balance in full before that 0% interest rate is gone.
The surest way to win is to buckle down and figure out the best way to get out of debt as aggressively and quickly as possible.
Clever Girl Tip:
If you choose to do a balance transfer, don’t run up new debt on your old or new credit card. Remember, the whole point of doing the balance transfer is to save money on interest payments. By doing this, you can pay your balance off faster.
Also, ensure you don’t miss any payments or pay late, as this could void your 0% interest rate. At least make your minimum payment, or try to pay off as much as possible each month.
Ask for a lower rate
Depending on your credit and relationship with your cardholder, you may be able to get a lower rate. They may be offering a promotional rate as well. It never hurts to ask.
Call your card issuer and ask if you qualify for a reduced rate based on your credit history and relationship.
Apply for a personal loan
You may wonder, “Should I do a balance transfer or apply for a personal loan?” People opt for a personal loan to consolidate their credit card debt because they will have a fixed rate for the life of the loan rather than trying to pay it off before the promo rate matures.
This is a good option only if the rate is lower than the rate of your current card.
For instance, if your credit card rate is 23.99% and you qualify for a personal loan with a rate of 7.99%, then it would make sense to consolidate your debt. It could save you quite a bit of money in interest if you do it right.
Remember, you still need good credit to qualify for an unsecured loan. And you still want to consider all the fees involved to make sure the new rate really makes sense for you.
Some people opt for a secured loan, such as a home equity loan, to pay off credit card debt.
However, I advise that you try other avenues to prevent risking your home as collateral.
Should I do a balance transfer?
You should only do a balance transfer if it benefits you financially i.e. it will save you money, not cost you more. That’s why it’s essential to create a debt payoff plan and know the balance transfer cost.
One other benefit of a balance transfer is it may simplify your finances by allowing you to bundle all of your payments into one.
Again, you only want to transfer your balance if you can pay it off before the rate increases. Otherwise, it’s best to get rid of debt with another method.
Will a balance transfer hurt my credit score?
A balance transfer to an existing line of credit won’t hurt your credit score, but if you apply for a new line of credit, it could impact your score.
In general, you should use a balance transfer to reduce your debt, which in turn could increase your score by reducing your credit utilization ratio.
The lower your utilization ratio (your credit limit relative to your debt), the better it is for your credit score. That’s because your ratio makes up 30% of your credit score.
Is it a good idea to do credit card balance transfers?
A credit card balance transfer can be a good idea if you have a lot of high-interest debt and can take advantage of lower rates.
However, it can also worsen the situation by giving you access to even more credit card use. If used effectively, then a balance transfer can help pay off debt.
But use a balance transfer with caution and look for alternatives to get out of, and stay out of, debt.
How does a balance transfer work on a credit card?
When you move a balance from one credit card to another, you generally want to do so to take advantage of a lower interest rate or a promotional offer. When you decide to do a transfer, you send in your application.
Once approved, the issuer will most likely pay off the balance of the old card and then transfer the debt. Then, you’ll have to start paying off your debt on the new card.
What happens to a credit card after a balance transfer?
After a balance transfer, the balance of your old credit card will be paid off, which reduces or eliminates the debt. Your old card will probably remain open.
You can then either keep and use it or close it yourself. If you keep it open, limit any new purchases or try a no spend challenge to not increase your debt further.
What is the downside of a balance transfer?
The downside of a balance transfer is it doesn’t get rid of your debt, it just transfers your debt from one issuer to another. You may also have to pay a balance transfer fee, usually charged as a percentage of the transferred balance.
In addition, any promotional rates offered are usually temporary, and the real rates can be very high. And if your old credit card stays open, you may be tempted to use it again and get further into debt, defeating the whole purpose of a balance transfer.
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Be cautious with balance transfers
So, how do credit card balance transfers work best for your finances? When they can be paid off within the 0% interest rate promotion.
However, be cautious with balance transfers, no matter how great they sound.
It’s very easy to get sucked into a balance transfer card for rewards and cash back features but then rack up more debt because of the no-interest mentality.
The key is to make it work in your favor! That’s why it is vital you figure out your debt payoff plan before applying for the card. You can pay off your debt with or without transferring your balance by changing your money habits and learning how to use credit cards wisely.