What is a balance transfer?

It’s when you transfer an existing credit card balance to a new credit card to pay off old debt. This new card usually comes with a lower interest rate, often 0%, for an introductory period. The introductory period is a limited time frame during which the card issuer offers a special low or 0% Annual Percentage Rate (APR) to new cardholders. It’s a move to potentially save on the interest you’d otherwise be paying, giving you some time to pay down your debt faster. It’s giving yourself a financial break, where you get to hit pause on those hefty interest charges for a bit.

You’ll typically see a timeframe like 6 to 18 months for this 0% interest period. During this time, every payment you make goes directly towards reducing your principal balance instead of towards interest, making it easier to clear your debt quicker.

People in various situations might find balance transfer cards particularly beneficial. For example, if you’re juggling several high-interest credit card bills and struggling to keep up, consolidating that debt into one manageable payment at a lower rate can be a lifesaver. It’s also handy for those looking to give their credit score a boost by paying down their balances more aggressively.

But it’s crucial to understand how they work before jumping in.

Key Factors to Consider in a Balance Transfer Credit Card

1. Introductory APR Offer

• Look for a 0% APR on balance transfers, ideally lasting 6 to 21 months.

2. Balance Transfer Fee
   • Fees typically range from 3% to 5%. Some cards may offer $0 fees.
3. Regular APR
   • Check the APR that applies after the intro period to avoid high interest.
4. Annual Fee
   • Lean towards cards with no annual fee to save on costs.
5. Credit Limit
   • Ensure the limit is sufficient for your transfer amount plus any fees.
6. Eligibility Requirements
   • Good to excellent credit is usually needed; transfers between the same issuer are often not allowed.
7. Transfer Window
   • Confirm how long you have to complete the transfer after opening the account.

By focusing on these factors, you can select a balance transfer credit card that effectively aids in managing and reducing your debt.

The Benefits

Balance transfer credit cards can be a powerful ally in your financial toolbox, but only if you know how to wield them properly. Let’s break down the benefits first.

The most obvious perk is those sweet, low interest rates. Many balance transfer credit cards offer an introductory period with 0% interest. This can make a world of difference as you have the opportunity to pay down debt without racking up additional interest charges. Think of it as a temporary financial breather that lets you catch up.

Debt consolidation is another significant advantage. Instead of juggling multiple payments with varying interest rates and due dates, you can combine everything into a single monthly payment. This can simplify your finances and help you keep better track of your payments.

Improving your credit score is another positive outcome that can come from using a balance transfer card wisely. By reducing your credit card balances through diligent payments, you can lower your credit utilization ratio, which in turn can boost your score. Just keep an eye on how close you are to your credit limit on the new card; maxing it out can counteract the benefits.

The Risks

On the flip side, there are some risks to be aware of. Balance transfer fees are often a given. Typically, you’ll be charged a fee that’s a percentage of the amount you’re transferring, usually around 3% to 5%. This can add up depending on how much debt you’re moving, so it’s important to do the math and ensure the savings outweigh the cost.

The low or 0% interest rate is often temporary. Once the introductory period ends, the interest rate can skyrocket. If you haven’t paid off your balance before this happens, you could find yourself in a similar or worse situation than you started with. Make sure you know when the intro period ends and have a plan to pay off the debt by then.

Additionally, opening a new credit card and transferring a balance can initially impact your credit score. While paying down your debt can boost your score over time, the initial impact of applying for new credit can cause a small dip.

Here are some potential positive and negative impacts to your Credit:

Potential Negative Impacts:

1. Hard inquiry: Applying for a new balance transfer card results in a hard credit check, which may temporarily lower your score by a few points.
2. Reduced average account age: Opening a new credit card lowers the average age of your accounts, which can negatively impact your score.
3. You may see both open accounts listed on your credit report at the same time for a short period.

Potential Positive Impacts:

1. Lower credit utilization: Adding a new card increases your total available credit, which can lower your overall credit utilization ratio if you don’t add new debt. This can improve your score.
2. Debt reduction: Using the balance transfer to pay down debt more quickly can improve your credit score over time as your overall debt decreases.
3. Improved payment history: Consolidating multiple payments into one may make it easier to pay on time, which positively impacts your score.

In the short term, you may see a slight dip in your credit score due to the hard inquiry and new account. However, if you use the balance transfer responsibly to pay down debt, your score is likely to improve in the long run as your credit utilization decreases and you establish a positive payment history. Remember that keeping old accounts open (even if unused) can help maintain your length of credit history. Please do not close the account the balance was transferred from. The key is to use the balance transfer as part of a strategic plan to reduce debt and improve your overall financial health.

We’ve covered a lot of ground here, but the key takeaway is to evaluate your personal financial situation carefully. Examine how much debt you have, what interest rates you’re currently paying, and whether a balance transfer credit card will help you achieve your financial goals. Understanding both the perks and pitfalls will help you make an informed decision.

Choosing the Right Balance Transfer Credit Card

Not all balance transfer credit cards are created equal, so choosing the right one requires a bit of homework. There are several companies out there offering enticing deals, but it’s important to dig deeper to find the best fit for you.

Some reputable companies to consider for balance transfer cards include Citi, Discover, and Chase. These companies frequently offer competitive interest rates and various perks. For instance, the Citi Simplicity Card often has a long 0% intro APR period, and Discover it® Balance Transfer provides cashback rewards along with its balance transfer offer. Chase Slate Edge also pitches in with useful credit-building features.

Beyond the big names, check the terms carefully. Look out for the length of the 0% APR period and what the APR will be once that period ends. Balance transfer fees vary, and some cards might offer $0 transfer fees for a limited time.

Should you Choose a Credit Union or a Bank for your next Balance Transfer?

When deciding where to get your balance transfer card, consider both banks and credit unions. Banks often provide a straightforward application process and extensive online platforms, making management easy. Credit unions, on the other hand, might offer more personalized service and potentially lower ongoing interest rates. Credit unions are also known for their community approach and member-focused services, adding an extra layer of trust. Lets take a closer look at some of the differences:

Interest Rates

• Credit Unions: Generally offer lower interest rates after the introductory period.
• Banks: Typically have higher APRs after the introductory period ends.

Fees

• Credit Unions: Usually charge lower or no annual fees and balance transfer fees.
• Banks: May have higher fees associated with the card.

Rewards and Benefits

• Credit Unions: Offer simpler rewards structures, often less extensive.
• Banks: Provide more diverse rewards programs and perks.

Eligibility

• Credit Unions: Require membership with the credit union before obtaining the card with specific criteria.
• Banks: Open to anyone who qualifies based on credit score.

Technology and Convenience

• Credit Unions: May have fewer tech resources but often participate in shared branch networks.
• Banks: Usually offer advanced mobile apps and larger ATM networks.

Customer Service

• Credit Unions: Known for personalized, community-focused service.
• Banks: Often provide extensive 24/7 support options.

Credit Building

• Credit Unions: May be more lenient with lower credit scores, helpful for rebuilding credit.
• Banks: May have stricter approval processes.

In summary, credit unions typically excel in lower rates and fees, while banks may offer more features and convenience. Your choice should depend on your financial needs and preferences. So how do you complete the transfer once you have been approved?

After getting approved for a new card:

1. Request the Balance Transfer

• Log in to your app/online banking or call customer service to provide details of the account and transfer amount.

2. Wait for Processing
   • Allow 3-15 business days for the transfer to complete.
   • Always continue making payments on the old card until it’s finalized to avoid any late payments on your current card.
3. Confirm Completion
   • Check that the balance has moved to the new card and that the old balance is zero.
4. Pay Off the Transferred Balance
   • Create a repayment plan to pay off the balance before the intro period ends.
   • Consider setting up automatic payments and putting extra money towards the balance.
5. Avoid New Purchases
   • Focus on paying down the transferred balance, as new purchases may not have the same promotional APR.

Here are some final things to keep in mind: Make sure you’re aware of the total cost, including fees. Calculate if the savings on interest outweigh the transfer fee. Plan to pay off the balance before the introductory rate expires or as close to that date as possible to maximize benefits. And always be mindful of your credit limit to avoid the temptation of overspending.

The bottom line: A little research and careful planning can go a long way in choosing the right balance transfer credit card. Assess your financial situation, compare offers, and pick one that aligns with your goals. Balance transfer cards are just one tool in your financial toolkit—use them wisely!

Does any of this seem overwhelming? Still not sure what your next step should be? If this is true for you please take the time to schedule a free consultation with Transforming Finances. We can discuss in depth any questions or concerns you may have about this process. I have walked 100’s of people through balance transfers and I will gladly assist you as well.

Until Next Time!

Disclaimer:
The information provided in this post is based on my experience and research in personal finance. While I strive to share accurate and helpful insights, this content is for informational purposes only and should not be considered professional financial advice. Please consult a qualified financial advisor for advice tailored to your specific situation.