Balance transfer cards can be immensely helpful when you are dealing with huge credit card debt and high-interest rates.
For some, the 0% introductory offers of balance transfers can help cut down years off of their debt repayment and save thousands in interest payments. For others, balance transfer cards can just be another temptation leading them into even more debt.
That is why, before you even apply for balance transfer cards, it's necessary to understand what is balance transfer, how it works, and weigh its pros and cons.
A balance transfer refers to moving your balance from an existing credit card onto a new card. In simpler words, you move the debt from one card to another when the debt has accumulated over time and you are finding it difficult to pay it all.
Ais a very effective way for paying up expensive credit card debt all the while saving money on interest. Most balance cards offer a lower introductory interest rate or even 0% APR (annual percentage rate) for a period of six to 18 months.
For people that have been paying high-interest debts, moving to a balance transfer card with lowered interest can potentially be the help that they need to pay off all of their debts.
To move to a new card, you will also have to pay a balance transfer fee which is usually 3-5% of the total transferred amount.
When you have accumulated large debt on yourwith a high interest rate, transferring the balance to a whole new card can help you pay up the debt easily. With a lowered interest rate, a big chunk of your monthly payouts will go towards paying the principal amount instead of paying the interest. This will in turn help you pay out the owed amount more quickly and also help you save money in the long-term.
The process of moving the balance from an existing credit card to a new card is pretty straightforward. Here’s how it works:
1 - Apply for a new card: Look for a card that offers 0% APR or considerably low interest. Keep in mind that you may not be able to get a new card from the same provider as your current card. So, you should look out for different ones.
2 - Initiate the balance transfer: At the time of application, you will have to provide details about the existing card and the total balance you want to roll over to the new card. You will be asked the name of your current credit card provider and the card number as well for verification.
3 - Wait for the transfer: Once your application is approved, the new card provider will pay the debt on the old card and roll over the balance to the new card. It can take anywhere between 1-2 weeks for theto happen.
4 - Start paying the balance: With the balance added to your new credit card, you will now have to make monthly repayments to the new card.
Balance transfer cards can benefit you in many ways, including:
Lower interest rates
If your debt has majorly been building up on your old card because of high APR, it is all the more reason for you to consider transferring the balance to a new card.
With high APR, interest charges can quickly balloon over time. Before you know it, you would be paying more in interest than the principal amount.
But with balance transfer, you can get a lower interest rate, eliminate extra interest charges, and pay off your debt easily.
Credit card providers make money through the interest that they charge you. Now, this interest can vary according to the card that you have. While basic cards usually have low-interest rates, more premium cards with benefits and rewards charge high interest.
Until and unless you pay your credit card bills before the due dates, you don’t really have to worry about the interest rate.
But when you can’t pay your full credit card bill for the month and carry a balance forward to the next month, there will be interest charged over the amount and you will have to pay more than what you initially owed the credit card provider. This can get really expensive if you are only paying the minimum monthly repayment.
Balance transfer helps you cut through this vicious circle by not only transferring your debt to a lower interest card but also giving you a clean slate. You can pay off your debt in a steady manner instead of worrying about the interest piling up.
Pay debt faster
Paying less interest directly means that you will be able to pay off the debt faster. Since the interest is lowered or even zero in some cases, you are paying less of the interest and more of what you owe to the credit card provider.
Most balance transfer cards offer introductory low-interest rates or even zero-interest for the first few months. You can take advantage of this introductory period and clear out your debt faster without worrying about high interest.
When you are switching from one credit card provider to another, you can also apply for a new card that offers rewards programs on spending or gives perks for shopping at specific places. Even if you are going for a basic balance transfer card with a low-interest rate, you may still find one with perks that are worth considering.
Though when you are considering balance transfer cards, always keep low-interest rate as your main priority. After all, that’s the major reason you are even switching to a new card. A balance transfer card with zero interest rate and no perks is better than a card with 5% interest rate and a few perks.
Get a better credit card
Not all credit cards are created equal – Some will always be better than others. Maybe you were new to the credit card world when you got your old card and messed up, creating a big pile of debt behind you.
But balance transfer gives you the opportunity for a doover. You can get a better credit card with more favourable terms and charges to tackle your debt.
While there are many advantages to using balance transfers, there are also some cons you need to consider:
Risk of more debt
Transferring to a whole new credit card means you suddenly have more credit available than you did before. And it can be rather tempting to use up that extended credit line.
But using that new credit to make impulsive purchases can put even more debt over you. Eventually, you may find yourself exactly where you were before.
Therefore, when it comes to balance transfers, you should first focus on clearing your debt completely without using the new card for any other new purchases.
Balance transfer fees
The low-interest rates can seem alluring but you should also remember that most credit card companies charge a fee for transferring the balance from your old card to the new one. These fees can be anywhere between 0-5% or even more. It's necessary to check the fees before you even apply for a new card to ensure you know exactly what you are getting into.
Introductory offers don't last forever
Just because a balance transfer card is offering you an introductory 0% interest rate and a bunch of extra perks doesn’t mean that it will stay the same forever. Introductory offers only last for a short period of time.
If your card is offering a low balance transfer rate as an introductory offer for the first few months, chances are, you will have to pay an interest rate higher than the market average after the offer duration is over.
Your new balance transfer card may not be able to clear out the entire debt for you. Credit cards have a credit limit of their own and this limit is usually determined by a lot of factors including your credit score and the credit card provider. There is also a balance transfer limit that is set, which is usually 70-100% of the credit limit.
If your debt is too high, you might only be able to transfer a portion of your debt to the new card. In cases like these, you can also apply for multiple balance transfer cards to transfer your entire debt into different cards.
Excellent credit recommended
When you have a lot of debt piled up along with high credit utilisation, you may not even be eligible to get a balance transfer card. Typically the 0% interest balance cards are offered to individuals that already have a high credit score – which is difficult to have when you are already burdened with debt.
Let’s assume you have $6000 debt piling on your current credit card, which has an interest rate of 15%. So even if you pay $500 every month, it would still take you 14 months to pay off the entire balance, plus the interest of $541.30
But if you transfer the same amount to a balance credit card with 0% interest and a transfer fee of 3%, you could pay off the entire debt in 13 months and pay only $99.45 interest.
While it can be tempting to switch credit cards and get a lowered interest rate, there are many things that you should look out for when looking for a balance transfer card, including:
Applying for multiple balance transfer card deals
Every time that you apply for a credit card, it affects your credit score. If you apply for too many balance transfer card deals, it may severely affect your credit score and make it all the more difficult to get a new card.
Spending on the balance transfer card
New card, new credit limit, and with it, comes new temptations. You may want to make new purchases with the new card since you already have it with you. But it's important to note that most cards charge new purchases at a higher interest rate than the balance that is transferred. That means, your new purchases will be paid off first, with a heavy interest levied on them.
To avoid getting into another circle of debt, it's best to limit all new spending on the balance transfer card.
Withdrawing money from an ATM
While most credit cards give you the option to withdraw cash, this is a trap you should completely avoid. For cash withdrawals, you are charged a cash advance rate which can be as high as 20% or even more.
The withdrawal amount will incur interest right from the day you take it out of the ATM.
Reverting to old habits
Getting a new balance transfer card takes a lot of time and effort. When you get one, you need to make sure you create a budget for yourself.
You don’t want to get stuck in the same old spending habits and build a debt even bigger than the last. Make sure to pay all your pending debt in full every month to avoid late payment fees and more interest.
Misunderstanding the terms and conditions of the card
Here’s the thing: Credit cards can be confusing.
There are so many details present in the finer prints, it's easy to miss them out. But misunderstanding the terms and conditions, or worse, glossing over them casually can eventually land you in hot water.
For instance, your new card might state you can make new purchases interest-free, but that doesn't mean the new purchases will be interest-free forever - There might only be a short interest free period.
Creating debt that isn't paid off
Do not get a balance transfer card unless you are sure you can actually pay off the debt in its entirety. When you get a balance transfer card but fail to pay off the balance, you will eventually need to get another balance transfer card. As a result, you will find yourself in a revolving cycle of debt and no way to get out of it.
A balance transfer card is ideal for you, when:
- You have significant credit card debt and you are paying high interest on it
- You can afford to pay that debt if the interest is lower or even 0%
- You can find a new credit card that offers low-interest rate or 0% interest for at least 12 months or more, and it has a considerably low annual fee
- You are eligible for a new credit card account that allows balance transfer
- You know you will only be using the new card to pay off your old debts and not make any new purchases
Consider the following questions if you are confused about whether you should even get a balance transfer card or not:
- Does the balance transfer card have enough credit limit to cover all your debt at once or will you have to apply for multiple cards?
- Is there a balance transfer card that can offer you 0% interest for an introductory period of at least 12 months or more?
- Will you be able to pay off your debt before the end of the introductory period is over?
- Are the other fees of the balance transfer card affordable to you?
- Will you be able to limit the usage of the new card and ensure you are only using it to pay off your debt?
- Have you calculated exactly how much money you can save by transferring to a balance transfer card? Is it worth the hassle?
When you apply for a new credit card, an inquiry is generated on your credit report, which usually affects your credit score for some time. Shifting your debt to another card may also affect your score.
In fact, your credit score can take a hit when you load all of your debt into one low-interest card and max it out.
So, yes, for a short while balance transfer can hurt your credit score since an inquiry will be generated for your credit score to determine your eligibility for the card.
But in the long run, balance transfer credit cards can actually give your credit score a boost because you get an additional credit line with you. Basically, the more credit you have available and you are not using it, the higher your credit score will be. You can check your credit score for free with.
Too many card options available making you confused? Here’s what you need to know before apply for any balance transfer:
- Find the right card: Since you are already in debt, you want to make sure that the balance transfer credit card you choose can actually help you. Take your time comparing different card offers and finally decide on one that can work the best for you. Consider the interest rate, annual fee, and other rewards that might be offered by the credit card provider.
- Look into the fees: In most cases, you will be required to pay a one-time balance transfer fee which will usually be 1-5% of the total transfer balance transfer amount. You will also have to pay a fixed annual fee for the card. Take all of these fees into account when you are finalising a balance transfer card.
- Identify transfer limitations: While your credit limit will already be specified by the credit card provider when you apply for the card, there may also be a transfer limit. That means you may only be allowed to transfer a specified percentage of your credit limit. You need to make sure the specified transfer limit works for you.
- Understand what happens after the introductory period: Most credit card companies offer alluring introductory offers just to get more people to sign up, but then they drastically hike up their interest rates after the introductory period is over. If you aren’t sure you can pay up your entire debt during the introductory period, make sure the card at least offers a low-interest rate even after that period is over.
Using a balance transfer card is quite different from using a normal credit card. Here are some things to keep in mind.
Keep your spending under check:* As mentioned before, when you make new purchases with a balance transfer card, your credit bill payments will first go towards paying off those new purchases, before clearing out the transferred balance.
That means, if you keep making new purchases from this card, it may become more and more difficult for you to pay off your old debt. As a result, you should think about what you can afford at the moment and avoid using your new balance transfer card to make everyday purchases.
Look into the rewards: If your balance transfer card offers rewards, you should look into them to make the most out of those rewards. However, you should remember that most reward cards offer rewards on spending, which isn’t something you want to do with your balance transfer card. Paying off your debts should always be your priority.
Understand your billing terms: Credit cards come with their own billing cycles and payment terms. You need to make sure you understand all of them so you don’t miss out on any payments. When is the credit card bill generated? When is the due date for paying the bill? What are the charges in case you miss the payment for a month? How is the interest accumulated?
If you are considering getting a balance transfer card, here is what you need to do to make sure it works for you:
Pay off your balance on time: The low-interest rate most balance transfer cards provide only lasts for a limited time, which can usually span from six months to 2 years. You want to make sure you can repay your debt before the interest rate goes up.
Avoid making new purchases from the card: Your balance transfer card should only be used to repay your old debt and not make any new purchases. Instead, you can get a separate card for your daily expenses.
Cancel your old credit card: Once your balance is transferred to the new card, cancel your old card immediately. You want to avoid all the temptation you can to create more debt
Stay determined to improve your credit score: When you apply for new credit cards, your credit score usually takes a hit. Add to this the outstanding debt on your old card and you may find yourself with a less than ideal credit score. But the good news is, you can steadily build back your credit score in time by making timely payments on your new balance transfer card.
Now that you have carefully weighed out all the pros and cons of a balance transfer card and decided that it's the right choice for you, it's time to choose the best balance transfer card.
There are many options available in the market which can make it hard to decide on one. Here are some of the factors that you should consider:
Duration of the introductory offer: Most credit cards will only offer low-interest rates for a short duration. You need to know exactly when it ends to ensure you can pay off the majority of your debt before the offer duration ends.
Interest rate: Consider the interest rate of the balance transfer cards and calculate which ones offer the lowest interest for the longest period of time.
Balance transfer revert rate: This is the interest that is charged after the introductory period is over. In most cases, it is much higher than the usual market average. It's also a good idea to calculate your monthly credit card bills in advance to ensure you can clear your debt before the increased interest rate kicks in.
Transfer limit: Balance transfer cards often have a transfer limit to them, which is basically the total debt you can transfer from your old card to your new one. In case your debt is much higher than the transfer limit, you can shift your debt to multiple balance transfer cards.
Fees and charges: There can be different types of fees associated with your new card including annual fees, transfer fees, cash withdrawal fees, and more.
A balance transfer makes sense only if you are confident you can pay off the majority of your debt before the promotional period ends and the increased interest rate kicks in. Make sure to do all the necessary calculations when considering balance transfer before you make a move.
Most importantly, you should compare balance transfer offers available and choose the one that perfectly suits your requirements.