Are you looking for a way to get out of debt faster? Do your credit card bills seem to be spiraling out of control? Do you sometimes feel like you’re struggling to keep your head above water? If so, a balance transfer credit card might be the ideal solution for you. By transferring your credit card balance to one of these cards with a low or 0% interest rate, you can easily pay off your debt without the interest adding up and keeping you trapped in the vicious cycle of debt.
How do balance transfer cards work?
With a balance transfer credit card, users can switch their outstanding balance from one card to another to benefit from lower interest rates or special offers. Balance transfer credit cards function by allowing users to move their outstanding balance from a credit card with a higher interest rate to one with a lower rate, typically one with a 0% annual percentage rate (APR) introductory offer. By doing this, the user can reduce their short-term interest costs and accelerate their debt repayment.
Benefits of a balance transfer credit card
Using a balance transfer credit card provides several key benefits, including:
Pay zero interest for a period of time
Many balance transfer cards offer an introductory 0% APR, which means you won’t have to pay any interest during that period. This can help you save hundreds or even thousands in interest payments over time, depending on your balance.
Pay down debt faster
Most balance transfers have no fees for the services. They usually don’t even require a minimum payment. By transferring your balances to a card with a 0% intro APR, you can save on interest and put more money toward paying down your debt each month. Instead of paying interest, your payments go toward the balance. Keep in mind, the interest rate won’t stay 0% forever. Eventually, the interest rate will rise, so try to pay off the balance during the introductory period.
Potentially improve your credit score
A balance transfer credit card can help you boost your credit score in a number of ways. By transferring your balances, you can reduce the amount of debt that appears on your credit report, which can raise your credit utilization ratio and increase your score. Additionally, if you are able to pay off the balance before the intro period ends, it will show that you are responsible with credit, and lenders may be more willing to offer you better terms in the future.
Simplify your payments
A balance transfer credit card can help simplify your payments and make managing your debt easier. By transferring multiple balances onto one card, you’ll be able to pay just one monthly payment instead of several different payments each month.
Earn potential credit card rewards
Rewards for paying off debt and saving money almost sound too good to be true, but it’s real! A balance transfer credit card is a great way to earn rewards and bonuses. By transferring debt from one or more existing cards to the new balance transfer card, you can take advantage of reward points, cash back, airline miles, and other discount programs offered by the credit card issuer. Many balance transfer cards allow you to accumulate points for every dollar spent on eligible purchases such as groceries, gas, and dining out. You may also get additional bonuses when you make certain types of purchases or when you reach a certain spending level.
What types of debt can you put on a balance transfer credit card?
Balance transfer credit cards are a great way to reduce the amount of high-interest debt that you owe, but the exact type of debt you can put on the card will vary between issuers. Here are some common types of debts that are often transferable.
High-interest-rate credit cards
Balance transfers can be a great way to reduce the cost of paying interest on high-interest credit cards. By transferring the balance from one card to another, you can lower your rate and save money in the long run. Depending on the card, you may get access to benefits or rewards that weren’t available with your previous credit card.
Make sure you understand any restrictions that come with this offer such as how long your introductory period lasts and whether there are any fees associated with it so that you can properly plan how much you’re able to pay each month and still have enough left for other expenses.
Car loans
Car loans typically come with much higher interest rates than credit cards because of their longer repayment periods and larger amounts borrowed. Balance transfers can help you pay off your car loan more quickly by reducing the amount of interest paid over time and offering more flexibility when it comes to monthly payments.
Student loans
Student loan debt can also be transferred if you’re looking for some extra breathing room when it comes to repayment. But student loan servicers may require additional documentation depending on the type of loan or servicer involved so make sure to check with the company before attempting a balance transfer.
Personal loans
Transferring a personal loan to a balance transfer credit card can be an effective way to save money on interest and fees. The idea of transferring a personal loan, such as one taken out with a bank or traditional lender, to a balance transfer card is to take advantage of the 0% introductory APR period that most cards offer. This means you can pay off the loan, and any additional purchases you make during the introductory period, without having to worry about paying high-interest rates.
If you’re considering transferring a personal loan to a balance transfer credit card for cost savings purposes, remember that using this strategy requires you to pay off your debt within the promotional period offered by the card issuer so you don’t incur interest charges or late payment penalties.
Is a balance transfer card right for you?
Only you can decide whether a balance transfer card is right for your financial situation, but having an informed understanding of all available options and being mindful of potential pitfalls can help ensure that whichever route you choose will be beneficial in the long run. Here are some important things you’ll want to consider.
Consider the fees
A balance-transfer fee is the most typical fee related to a balance-transfer credit card. The fee for this service is usually between 3% and 5% of the total amount being transferred. A 3% fee, for instance, would be $30 if you were transferring $1,000 from one credit card to another. Before completing the transfer, make sure to compare your options because some credit cards waive this fee.
Another possible fee associated with balance transfers is an annual fee. Some cards charge an annual membership fee for participation in the program that can range anywhere from $25 to $100, depending on the offer. Many cards also carry additional fees such as late payment fees and cash advance charges. It’s important to consider all your options and understand what fees you may incur before selecting a specific card.
Consider the timeframe
Consider the timeframe that you will have to pay off your balance before any additional interest rates are applied, which can often range from six to 18 months.
Compare different offers when researching what type of balance transfer card is right for you. Different companies offer different rates and terms, so it’s vital to shop around and assess all available options before committing yourself. Understanding how much interest rate relief a card provider offers can help determine whether pursuing a balance transfer card makes sense financially. If possible, try to find cards that offer 0% APR for at least 12 months on transferred balances — doing so could save you hundreds of dollars in finance charges over time.
Consider whether you’ll be tempted to overspend
If you’re not careful, you could end up accumulating more debt than you had originally, which can be extremely difficult to pay off. Try not to use your new card for any purchases besides what’s necessary in order to avoid further accumulation of debt.
Before applying for a balance transfer credit card, it’s important for borrowers to evaluate their financial situations and create a budget so they know exactly how much money they have available each month for repayment purposes. Borrowers should also make sure that the amount of the balance transfer does not exceed their total available credit limit. If it does, they may be at risk of being charged additional fees and/or penalties by their lender or credit issuer.
In addition to setting limits and creating budgets, another way borrowers can protect themselves from overspending with a balance transfer credit card is through the use of automated payment features such as autopay and alerts. By setting up automatic payments on the account or activating email notifications when there are upcoming payments due, borrowers can keep track of their spending and ensure that all bills are paid on time — all without having to think about it too much.
A great option, depending on your circumstances
Generally speaking, balance transfers are a smart move if you’re trying to tackle large amounts of debt more quickly by taking advantage of lower rates and avoiding costly late fees. However, it’s important to keep in mind that not all balance transfer offers are created equal and making sure you understand all the terms before signing up is essential in order to maximize the benefits without getting stuck with an unfavorable agreement.
FAQ
Do balance transfers hurt your credit?
Doing a balance transfer can have both positive and negative impacts on your credit. Balance transfers may temporarily hurt your credit score, but if managed responsibly, it is possible to improve your score over time with the help of a balance transfer. Your credit utilization ratio — the amount owed compared to your available credit — may be reduced after a balance transfer, which can help to improve your credit score.
Does a balance transfer increase your credit limit?
Balance transfers do not necessarily increase your credit limit, as the amount you are transferring is typically already included in the current limit of your card.
What happens to my credit card after a balance transfer?
After the balance transfer is complete, the original card balance will be reduced by the amount you transferred. The original card will likely stay open unless you close it, provided you still use the card occasionally.
