Balance transfers allow you to move debt from one credit card to another. The point of a balance transfer is to move a high-interest debt to a credit card with 0% APR. This could save you significant money if done right and for the right reasons.
For instance, if you own $20,000 on a credit card with 18% APR and pay $400 monthly, it will take you seven years and ten months to pay off your balance, and you will end up paying $17, 244 in interest. That is a significant amount of money!
Advantages of a balance transfer
Doing a balance transfer can benefit you if you do it correctly. Your goal with a debt transfer should be to get out of debt as quickly as possible. Therefore, when you move your debt to a new card, you should never use the old card again – just cut it off!
Instead, focus on paying the balance on the new card as soon as possible before the 0% APR set time expires. That way, you don’t have to pay interest on your debt, giving you an edge when paying off your balances. Once you get rid of this debt, your credit score will increase, and you will have more money to save and invest in your monthly budget.
How balance transfer work
If you have a credit card debt with high interest, you apply for a low or 0% interest rate credit card. Once approved, you transfer the balance from the old to the new credit card. Typically, there is a transfer fee of 3% to 5% of the total amount you move. You should avoid a card with annual membership fees as this will defer the purpose of saving money. You will need a good credit score for a 0% interest rate. Lastly, make sure your transfer card’s limit is enough to move your total balance.
Furthermore, verify whether the card issuer offers a 0% APR on balance transfers and new purchases. Your new account will usually specify two different interest rates: one for the transferred balance and another for any new purchases you make.
If you add new charges to a balance transfer card on top of the balance you have transferred, you need to understand how your payment will be distributed. Typically, if there is a lower interest rate on the transferred balance than on the new purchases, payments will be applied to the transferred balance first.
Things to keep in mind
- Some 0% APR offers only apply to purchases, so apply to one with an introductory 0% APR promotion on balance transfers.
- You must do balance transfers between cards from different banks. Same bank transfers are not allowed.
- Once approved for the new card, you have 120 days to complete the transfer — they are limited-time offers.
- The amount of debt you can transfer is limited. This is typically based on your total credit limit percentage.
- Have a budget in place to avoid defaulting on your new payment. If you cannot pay, that will hurt your credit, and you will get deeper into debt.
- Most cards require good credit.
How can this affect your credit score?
Initially, your credit score will decrease because of the hard credit inquiry the new card application will create in your credit report. However, a balance transfer can increase your credit score in the long run. Paying your debt improves your debt-to-credit ratio. Also, opening a new account will increase your available credit and reduce your debt-to-credit balance.
What is the best transfer credit card?
There are three essential characteristics you should look for in a transfer credit card. You want a card with:
A 0% introductory APR offer for balance transfers.
A $0 annual fee.
A $0 balance transfer fee or no more than 3%
After all, if you can get this offer, use it to get out of debt. Credit card debt can be detrimental to your financial health and affect you mentally and physically, leading to anxiety and depression.
Once you can get out of debt, avoid falling back into it. Create a monthly budget, so you don’t spend more than you make. Also, create healthy financial habits such as saving, investing, and frugality. These habits can make you wealthy.
