How Do Credit Card Balance Transfers Work?

If you have credit card debt—meaning you carry a balance on your card(s) rather than paying it off every month—you might benefit from a balance transfer. This lets you “refinance” high-rate credit card debt for a temporary zero percent (or other extremely low) rate. 

That gives you the opportunity to pay down your debt much faster because you won’t be throwing as much of your money at interest rather than principal. Sounds straightforward, but like all things credit card–related, balance transfers come with multiple catches. 

Deals that seem great may not be. Confusing terms can trap you with even more debt. Before you transfer your balances, make sure to read all of the fine print and compare different transfer options. That way, you’ll get the biggest benefit out of your balance transfer.

How Credit Card Balance Transfers Work

You’ve probably gotten balance transfer offers in the mail or in your email, offering a zero percent APR if you move over debt from a competing credit card. It sounds like a great deal, trading 16.99 percent debt for zero percent debt, and paying no interest at all for six to eighteen months. 

These deals can help you reduce crippling credit card debt and finally help you get ahead financially if you use them wisely. That’s harder to do than it sounds, but when you go into it with foreknowledge and a clear plan, you can use balance transfers to your advantage and make a serious interest-free dent in your debt.

Save Money and Pay Off Debt

Sky-high credit card interest charges can make it extremely hard to pay off your debt. The minimum payments barely cover the current interest, leaving pennies to pay toward principal. You can make slightly more progress by making more than the minimum payments, but still, a large portion of every payment will go toward interest. 

That’s where the zero percent (or even a very low rate) balance transfer card comes in so handy, as long as your goal is to fully pay off the debt that you transfer during that promotional period. 

Once you transfer high-rate credit card debt on to a no-interest card, every dollar of every payment will go toward your debt. That lets you pay your debt down much faster and at a lower cost. For example, let’s say you owe $4,500 on an 18 percent credit card. 

If you can afford to pay $300 a month, it will take you eighteen months and cost $636 in interest. If instead, you transfer that $4,500 balance to a zero percent card with a 3 percent transfer fee, you’d pay off your balance in fifteen months and it would cost you $135 in interest.

How To Choose a Balance Transfer Card

Before you pick a balance transfer card, figure out how much you want to transfer and how long it will realistically take you to pay that off. For example, if you can afford to pay $250 a month toward this debt and you want to transfer $3,500, you’ll need a transfer card that offers that zero percent rate for at least fourteen months. 

Don’t discount cards that charge balance transfer fees in exchange for a long-term zero percent rate. These fees usually run between 3 and 5 percent of the amount you transfer; so, for example, you’d pay $60 if you transferred $2,000 with a 3 percent fee. 

You’ll still save money because the transfer cost (almost) always comes out to much less than the interest you would have been charged. 

Do look at any other fees associated with the new card. For example, if the transfer card comes with annual fees, remember to factor that into your repayment plan. You’ll also want to be aware of any late payment fees, just in case.

How To Avoid The Pitfalls of Balance Transfer Cards?

Balance transfer cards are full of pitfalls that can derail your financial plans. Be aware of these traps, and avoid them at all costs or you may end up deeper in debt than when you started. Though your paydown plan starts with choosing the right balance transfer card, all of them come with these same potential dangers.

Balance transfers don’t happen instantly. They can take up to two weeks. If cards you’re transferring balances from having payment due dates during that time, make those minimum payments. Otherwise, you’ll get hit with late payment fees, which can go as high as $39.

1. Watch Your Payments

Once you’ve done a balance transfer, do not miss a single payment due date. Being late by even one day will eliminate your zero percent interest rate, the whole point of the transfer. Plus, most cards will also charge you a late payment penalty, which will add to your balance due. 

To avoid this trap, schedule automatic monthly payments from your checking account that cover at least the minimum payment due. Set a reminder for yourself so you can make sure you have enough in your checking account to cover that payment.

2. Know the Time Frame 

Before you make the transfer, figure out how much you can devote to each monthly payment in order to be done by the time the zero percent rate disappears. Make sure that you pay off the full transferred balance during the promotional period. 

The split second that period ends, the rate will go sky-high. Beware, some cards will charge you interest retroactively on the unpaid balance. 

That means you’ll suddenly owe six (or twelve or eighteen) months’ worth of interest on the remaining balance due. And like all other credit cards, unless you pay the card off in full, you’ll end up paying interest on that interest.

Don’t Use the Card for Anything 

I can’t stress enough how important this is: Do not use your balance transfer card for anything at all until after you’ve paid off the full transferred balance. 

First, new charges on this card will be paid before any money goes toward your transferred balance. For example, if you use the balance transfer card to buy $100 of groceries and make a $200 payment toward your debt, the first $100 of your payment goes directly toward that new charge. 

Second, if your payment isn’t enough to cover 100 percent of the new charges, those charges will start to rack up interest at the regular card rate, not the zero percent promotional rate. That means less and less of your payments will go toward your transferred debt, jeopardizing your entire paydown plan.

How to Do a Credit Card Balance Transfer

If you’re approved for a card offering 0% interest balance transfers, find out if the 0% rate is automatically applied or if your credit is checked first. Choosing which balances to transfer next is the next step; cards with the highest interest rates should be transferred first. Transferring a balance does not require the balance to be in the cardholder’s name.

Next, determine the transfer fee, which is typically 3% to 5% ($30 to $50 per $1,000 transferred). Does the fee have a cap? That can make it worthwhile to transfer large balances. You should also verify the credit limit on your new card before initiating a transfer. In addition, balance-transfer fees are deducted from the credit limit when the balance transfer is requested.

Request the Transfer

While a balance transfer is called a balance transfer, one credit card actually pays off another. These are the mechanics:

Balance-transfer checks

Upon transferring the balance to the new issuer (or from the old issuer to the new issuer), checks will be mailed to the cardholder. Cardholders make checks payable to the card companies they want to pay. You can write a check out to yourself with some credit card companies, but make sure this will not be considered a cash advance.

Online or phone transfers

Upon transferring the balance, the cardholder provides the credit card company with the account information and amount, and the company arranges for the funds to be transferred to pay off the account. For example, to transfer a $5,000 balance from a high-interest Wells Fargo Visa card to a Citi MasterCard with a 0% offer, you would provide Citi with the account number, name, and address of your Visa card and indicate that $5,000 is to be paid to that Visa card.

Watch Out For the Grace Period

It is not uncommon for people who take advantage of these offers to be charged unexpected interest charges. In order to transfer a balance, one must carry a monthly balance. If you don’t pay off the minimum amount each month, you’ll lose the introductory interest rate, the grace period, and unexpected interest on new purchases if you don’t pay off your monthly balance.

Grace periods are the time between the end of the credit card billing cycle and the due date for payment. A cardholder does not have to pay interest on new purchases during that time (by law, at least 21 days, but more often 25 days). However, Grace periods apply only if a cardholder does not have a balance on his or her card. If minimum payments aren’t made each month from a promotional balance transfer, consumers may not realize that the grace period may be impacted.

Due to the lack of grace period, purchases made on the new card after the balance transfer are subject to interest charges. Credit card companies, since the Credit Card Accountability, Responsibility and Disclosure Act of 2009, are now required to apply payments to the most-interest-bearing balances first, rather than the lowest-interest ones first.

Although many companies fail to make the terms of their promotional offers clear, according to the Consumer Financial Protection Bureau. Among other communications, issuers must explain how the grace period works in marketing materials, application materials, and account statements. 

It isn’t uncommon for credit card issuers to include these statements not in the credit card offer, but in other parts of their website, like Help, FAQs, or customer service.

You should also keep in mind that many offers specify that the credit score of the cardholder determines the actual number of months the cardholder receives 0% balance transfers.

It is best to pass on unclear terms regarding the grace period for purchases after a balance transfer; choose a credit card with 0% introductory APR on balance transfers and purchases; or consider a credit card with a 0% introductory APR on both balance transfers and purchases.

Transfers to Existing Cards

It is possible to transfer balances to an existing card, especially if a special promotion is being offered by the issuer. It is tricky, however, if the existing card has a balance that will only be increased when the transfer is made.

Assume that a cardholder owes $2,000 on a card with a 15% APR before transferring $1,000 from a second card. That card offers 0% APR for six months. After making $1,000 in six months, the cardholder pays off the $2,000 that was not covered by payments with the 15% APR rate for six months. Moreover, the $1,000 was transferred from a card with a 12% APR, resulting in a 3% loss.

You should also consider the impact of adding a large amount to a credit card on the credit utilization ratio, the percent of your credit available that has been used. This is a key component of your credit score. Consider a $10,000 credit card with a $1,250 balance. The credit limit is being used at 12.5%. By transferring $5,000, you create a balance of $6,250, so you’re using 62.5%. If you carry a balance on one card, it could hurt your credit score (since it is recommended to keep utilization below 30%) and eventually increase your interest rate. It is possible to mitigate this effect in part by transferring from the higher-interest card with a $5,000 lower balance.

Personal Loan Comparison

According to some financial advisors, credit card balance transfers are only worthwhile if the cardholder can pay off as much of the debt as possible during the promotional period. Cardholders will likely face another high-interest rate after that period ends, in which case they are probably better off taking out a personal loan – with rates that tend to be lower, or fixed, or both.

The cardholder might not be comfortable pledging assets as collateral, however, if the personal loan has to be secured. The credit card debt is unsecured, so the card issuer cannot come after the cardholder’s assets if he defaults. The lender can recover losses on a secured personal loan by taking assets.

Final Words

Credit card balance transfers can help you pay off your debt faster and save on interest costs without incurring charges or harming your credit rating. When you read the fine print, do the math before you apply, and create a reasonable repayment plan (one where you pay off the balance transfer before making new purchases), you could make good financial sense to take advantage of a 0% introductory interest offer on a new card. It shouldn’t be too difficult to find the best balance transfer card as long as you do your research.

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