Key Points:
-
A balance transfer credit card replaces your existing credit card debt with a new card.
-
The main advantage is the low-interest rate, often as low as 0% APR, which helps save on interest charges.
-
Balance transfer credit cards are most effective if you can pay off the debt during the introductory period.
Table of Contents:
1. What is a credit card balance transfer?
2. Benefits of a balance transfer
3. Drawbacks of transferring a balance
4. Suitable candidates for a credit card balance transfer
5. Top balance transfer credit cards
6. How to perform a credit card balance transfer
7. Alternatives to balance transfers
If you're burdened by a high-interest credit card balance, consider transferring it to a different credit card with a lower interest rate. This move can lead to significant savings if done correctly.
However, this raises several questions: What exactly is a balance transfer? Which credit cards offer the best balance transfer options? Who would benefit the most from a balance transfer? Discover the advantages and disadvantages of this strategy and learn how to transfer your credit card balance.
What is a credit card balance transfer?
A credit card balance transfer involves paying off your existing credit card debt using a new credit card. By transferring the balance, you move your debt from a card with a higher interest rate to one with a lower interest rate, helping you save money on interest and fees.
This approach is sensible if you can apply for and get approved for a new credit card that offers a special low-interest rate. Some credit card issuers may provide a zero-interest promotion for a limited time, for instance.
"It's important to note that a balance transfer doesn't change the total amount you owe. In fact, it could increase your balance if there are associated transfer fees," explains Carter Seuthe, CEO of Credit Summit.
Gates Little, CEO of Outline, a division of Southern Bank Company, points out that you will likely need to transfer the balance to a new card from a different financial institution than your current credit card issuer.
"A balance transfer can be an excellent way to reduce the total interest you're paying on your credit card debt, provided you consistently make payments toward the balance on your new card," says Little.
Benefits of a balance transfer:
Transferring a balance from one credit card to another comes with several advantages.
"First and foremost, you can enjoy savings on interest charges by moving away from your existing credit card debt," explains Nathan Grant, a credit industry analyst in Syracuse, New York. "You can use the money saved on interest to pay off your new debt sooner. Additionally, your credit score may improve because opening a new credit card account increases your overall available credit and reduces your credit utilization ratio."
Furthermore, some credit cards allow you to consolidate your debt by combining balances from multiple credit cards and transferring them to the new card. This simplifies the payment process, as you only have to focus on a single payment with a specific deadline.
Moreover, your new credit card may offer additional rewards or perks, such as cashback on purchases or generous airline miles, which could be more advantageous than your current credit card.
For example, if your current credit card has an annual fee, opting for a new credit card with a lower interest rate and no annual fee can lead to even more savings, provided you transfer the balance and close the old credit card before the annual fee renewal.
Drawbacks of transferring a balance:
However, balance transfers also have their downsides. According to Grant, the disadvantages may include:
1. Balance transfer fees: Most credit card issuers charge a fee of 2% to 5% of the transferred balance.
2. Transfer limits: Your credit card issuer may impose a limit on the amount you can transfer.
3. Impact on credit score: Initiating a balance transfer typically results in a hard inquiry on your credit reports, potentially lowering your credit score. Additionally, opening a new credit card can decrease your average age of accounts, further impacting your score.
4. Eligibility requirements: If you have poor credit, you may not qualify for a new credit card with favorable balance transfer terms.
5. End of promotional period: Zero- or low-interest promotional offers on new credit cards eventually expire. You have a limited timeframe to transfer the balance and pay it off in full before the interest rates increase on the new card.
"Make sure to check the interest rate once the promotional period ends. If the rate is higher than your current rate, ensure you can pay off the card during the promotion period. Otherwise, you may accumulate significant debt with higher interest rates than before the balance transfer," advises Little.
Suitable candidates for a credit card balance transfer:
Balance transfers may not be suitable for everyone. However, they can be beneficial if you meet certain criteria.
"Good candidates for a credit card balance transfer include individuals with multiple credit cards carrying high balances or those with one credit card holding a high balance and excessive fees that they want to eliminate immediately," says Jake Hill, CEO of DebtHammer Debt Consolidation. "A balance transfer can be an excellent idea if you struggle to pay off your balance in full and are subject to extremely high-interest rates."
If you've reached the limit on your current credit card, transferring the balance to a new card with a higher spending limit could be wise. This assumes you'll be a responsible borrower who won't max out the new card while working towards paying off the total debt as soon as possible.
However, a balance transfer may not be worth it if you don't qualify for a new credit card with favorable terms.
"Having a good to excellent credit rating increases your chances of qualifying for a new card with an attractive balance transfer offer," adds Grant.
Seuthe mentions that the best candidates for a balance transfer are those who have access to a 0% interest credit card for a limited period.
There are two additional scenarios where a balance transfer can be beneficial.
"If you've secured a higher-paying job after a period of unemployment and are ready to reduce your debt, a balance transfer could be a smart move. Likewise, if you're committed to curbing overspending and have a plan to pay off your debt, a balance transfer can complement other debt repayment strategies," recommends Grant.
Top balance transfer credit cards:
Wondering which credit cards are ideal for balance transfers? The experts agree that the best options are credit cards offering low to no interest rates (0% APR for a specific period), high spending limits, and no annual fees.
"The right balance transfer credit card depends on the terms, fees, and your current credit score," continues Grant. "Look for a balance transfer card with the most favorable terms and the longest 0% APR period to maximize this strategy. Additionally, most banks won't allow balance transfers from one card to another within the same issuer, as it's not beneficial for them."
How to perform a credit card balance transfer:
Transferring a balance involves several steps before, during, and after the transfer.
1. Research and find a new credit card that offers a 0% APR and allows balance transfers. If you already have multiple credit cards, one of them might provide these benefits. Otherwise, search for a suitable new card.
2. Before committing to a new credit card, verify its credit limit, and available credit, and carefully review any balance transfer limits or fees.
"Read and understand all the terms and conditions of the card you're transferring the balance to," advises Grant. "Next, determine the amount of debt you want to transfer."
3. Initiate the balance transfer either through the credit card's website or by calling the number on the back of your card and requesting assistance with the transfer.
"The duration of the transfer can vary from a few days to a few weeks, depending on the credit card issuers involved. You can track the status of a pending balance transfer online," adds Grant.
4. After the transfer is complete, focus on paying off your debt and taking full advantage of the transfer.
Alternatives to a balance transfer:
While securing a new credit card with a 0% APR, no fees, and balance transfer options may be the best way to reduce interest and eliminate credit card debt, there are alternative financing options to consider if you expect to carry a debt balance in the long term.
"Personal loans and debt consolidation loans provide clearer paths to reducing your debt load. These options consistently offer much lower interest rates than credit cards, especially after the zero- or low-interest rate introductory period ends," explains Seuthe.
