Should I Do a Balance Transfer? How They Work
Considering a balance transfer? Understand this financial tool's mechanics, evaluate its fit for your debt situation, and learn the essential steps to proceed wisely.
A balance transfer moves debt from one credit card or loan to another, typically a new credit card account. The goal is to consolidate multiple debts or reduce interest on existing high-interest balances. By shifting debt to a card with a lower interest rate, or a 0% introductory Annual Percentage Rate (APR), consumers can save money and accelerate debt repayment. This allows more of each payment to go towards the principal balance, helping individuals become debt-free faster.
Determining If a Balance Transfer Is Right for You
Deciding if a balance transfer is right for you requires assessing your current debt and repayment capabilities. Consider high-interest credit card balances, as these are most suitable for a transfer. Paying off the transferred balance within the promotional period is crucial to truly benefit.
A balance transfer can have both short-term and long-term effects on your credit score. Applying for a new credit card initiates a hard inquiry, which can cause a temporary, slight dip in your score. However, paying down the transferred debt improves your credit utilization ratio—the amount of credit you are using compared to your total available credit—which positively impacts your score long-term. Responsible spending habits are crucial to avoid accumulating new debt, which could undermine the benefits and worsen your financial standing.
Lenders look for a good credit history when considering balance transfer applications. A FICO score of 670 or higher increases your chances of approval for favorable terms. Approval also depends on factors like income and overall debt levels. With a plan to pay off the debt and financial discipline, a balance transfer can be a powerful tool for managing high-interest debt.
Understanding the Key Terms and Costs
Understanding the terms and costs associated with balance transfer offers is essential for an informed decision. Many offers feature a promotional Annual Percentage Rate (APR), often 0% or a very low rate, which applies to the transferred balance for an introductory period. This introductory period typically ranges from 6 to 21 months. Once this promotional period expires, any remaining balance will accrue interest at the card’s standard variable APR.
Most balance transfers include a one-time balance transfer fee, calculated as a percentage of the amount transferred. These fees commonly range from 3% to 5% of the transferred balance, with some having a minimum charge. While these fees add to the debt, interest savings during a 0% APR period often outweigh this cost.
The credit limit on the new balance transfer card determines the maximum amount of debt you can transfer. If the approved credit limit is not high enough to cover all existing debt, prioritize transferring balances with the highest interest rates. Minimum payments are still required even during the promotional APR period. Failing to make these payments on time can result in the loss of the introductory rate and the application of a higher penalty APR.
New purchases made on the balance transfer card might accrue interest at a different, often higher, APR immediately, even if the transferred balance is still within its promotional 0% period. This is known as “double-dipping” interest. Most credit card issuers prevent balance transfers between cards from the same bank or financial institution.
The Balance Transfer Application Process
After selecting an offer, the application process begins. Applications can be submitted online, by phone, or in person. You will need to provide personal details, income information, and details about the existing debt you wish to transfer, including account numbers and current balances.
After submitting your application, the card issuer will conduct a credit check and evaluate your eligibility. Upon approval, you will be notified of your new credit limit and the terms of your balance transfer offer. Initiating the transfer often requires providing the new card issuer with the account numbers and amounts from your old credit card accounts.
Some applications allow you to request the transfer during the initial application, while others require waiting until the new account is opened. Monitor the transfer’s progress, as it can take a few days to up to two weeks to complete. During this waiting period, continue making minimum payments on your old accounts to avoid late fees or interest charges until you confirm the balance has been fully transferred. After the transfer is complete, consistently making timely payments on your new balance transfer card is essential to avoid losing the promotional APR and to become debt-free.