How to Do a Balance Transfer on a Credit Card
Seamlessly manage your credit card debt. This guide provides clear, practical steps for a successful balance transfer and financial improvement.
A balance transfer involves moving debt from one or more credit card accounts to a new credit card, typically one offering a lower or 0% introductory Annual Percentage Rate (APR). This strategy aims to help individuals reduce the interest they pay on existing credit card balances.
Understanding Balance Transfers
A balance transfer consolidates existing credit card debt onto a new card, often offering a temporary period of reduced or zero interest. This introductory period, typically 6 to 21 months, allows cardholders to apply more of their monthly payments directly to the principal balance. The main motivation is to save money on interest and accelerate debt repayment. By moving high-interest debt to a card with a lower introductory APR, individuals can avoid significant interest accrual, which can otherwise prolong the debt repayment timeline.
Key Preparations Before Transferring
Before initiating a balance transfer, assess your credit score. Lenders typically offer the most favorable balance transfer terms, such as 0% introductory APRs, to applicants with good to excellent credit, generally defined as a FICO score of 670 or higher. A strong credit profile often increases the likelihood of approval for desirable offers and higher credit limits.
Researching and comparing various balance transfer offers is a crucial step. Pay close attention to the promotional APR period, which specifies how long the low or 0% interest rate will apply to the transferred balance. Most balance transfer cards also include a balance transfer fee, commonly ranging from 3% to 5% of the transferred amount, with a typical minimum fee of $5 or $10. This fee is usually added to the transferred balance.
Understand the regular APR that will apply once the promotional period expires, as this rate can be significantly higher. Identify which existing credit card debts you intend to transfer, noting their account numbers and current balances. This information will be necessary during the application process.
Most credit card issuers do not allow balance transfers between cards from the same bank. There are often limits on the total amount that can be transferred, typically tied to your new card’s credit limit. The balance transfer fee will also reduce the available credit limit for the actual transfer. For example, if you transfer $5,000 to a card with a 3% fee, your initial balance will be $5,150, which must fit within your new card’s limit.
Executing the Balance Transfer
Once you have prepared and selected a suitable balance transfer card, apply for the new card and initiate the transfer. During the application, provide personal details, account numbers, and outstanding balances of the credit cards from which you intend to transfer debt. This information enables the new card issuer to process the transfer request.
After submitting your application, the card issuer will review your information and creditworthiness. Upon approval, the new card issuer will handle the transfer of funds directly to your old credit card accounts. Continue making payments on your old cards until you confirm the transfer is complete and the balances are reflected as zero or reduced. This prevents any late payment penalties or negative impacts on your credit score during the transfer period.
Post-Transfer Management
After your balance transfer has been approved and the funds have moved, verify that the transfer is complete. Check the statements of both your new balance transfer card and your old credit card accounts to confirm that the balances have been accurately reflected. Ensure that the transferred amount, including any associated fees, appears correctly on your new card, and that the corresponding balances on your old cards have been reduced or eliminated.
Make timely payments on your new balance transfer card, especially during the promotional APR period. Failing to make minimum payments on time can result in the forfeiture of the introductory rate, causing the regular, higher APR to apply to your entire balance immediately.
Develop a clear strategy to pay down the transferred balance before the promotional period expires. Divide the total transferred amount by the number of months in your introductory period to determine the monthly payment needed to eliminate the debt interest-free. Adhering to this payment plan maximizes your savings.
Regarding your old credit card accounts, consider whether to keep them open with a zero balance or close them. Keeping accounts open can positively impact your credit utilization ratio by increasing your total available credit, which can be beneficial for your credit score. However, if you are concerned about incurring new debt, closing the accounts might be a safer option, though this could slightly reduce your overall credit limit and impact your credit score.
Avoid making new purchases on your balance transfer card if your goal is to pay down existing debt. Many balance transfer cards offer a promotional APR only on the transferred balance, meaning new purchases may accrue interest at the regular, higher APR from the transaction date.