One of the most significant drawbacks to high credit card debt is the interest payments you have to pay on monthly balances. Sometimes the interest fees alone can make it hard to keep up with payments.
One strategy for cardholders looking to get out of credit card debt and high-interest payments is to move their balance to a different card with better terms like zero interest. This strategy can help save you a ton of money while you pay off the card, but it isn't for everyone.
What is a balance transfer?
A balance transfer involves transferring high-interest credit card debt to another card with lower interest rates. This allows the cardholder to pay off debt faster by paying the principal balance down without paying interest fees.
Most lenders entice cardholders into balance transfers by offering a 0% annual percentage rate (APR) for a period of time (usually 12-18 months). Once approved, the cardholder has that introductory period to pay off the debt without interest. After the period ends, regular interest rates apply to any remaining balance.
As simple as this process seems, balance transfers can be complex and usually come with conditions that may not suit every cardholder.
Things to be aware of
- Transfer limits - the credit limit you're offered on the new card may not be enough to cover the full balance from the old card. In this case, a balance transfer may not be your best option.
- Transfer fees - lenders usually charge transfer fees of 2% to 5% of the balance. But these fees are minor compared to the interest you'll pay with a high-interest credit card balance.
- The 0% APR isn't forever - once you reach the end of the promotional zero-interest period (usually 12-18 months from account opening), regular interest rates apply to your balance.
- Time limit on transfers - some lenders may enforce a time limit for requesting a balance transfer; after that, the offer expires.
- Lender requirements - you may not be able to transfer credit card balances to another card with the same lender.
- Different interest rates - balance transfers carry different promotional rates, usually applied only to the transferred amount, not new purchases.
- It takes time - sometimes transfers can take up to six weeks to complete. During that time, you'll be responsible for payments on both cards.
- Good credit is required - know your credit score before applying. Good to excellent credit will get you the best offers, highest credit limits, and longest promotional periods.
How to do a balance transfer
Balance transfers typically require you to open a new line of credit with a different lender. This puts a hard inquiry on your credit profile, which may affect your credit score.
Since the best balance transfer offers are reserved for those with good to excellent credit, be sure to review your financial situation before deciding to apply. If you have poor credit, there's no better time than now to start rebuilding your credit score.
If you have good chances of getting approved, shop around for a card that offers a zero-percent interest rate for a long promotional period. Once you find the right card and get approved, the new lender will want information on your current account, including:
- Credit card account number
- Lender's name, number, and address
- Balance amount to be transferred to the new account
Once the transfer is initiated, verify the old card's balance has been closed and is now showing in the new account.
How to make a balance transfer work for you
Have a repayment plan in place first. Be sure your financial situation allows you to pay off the balance within the zero-interest period. If you can't pay your balance off within the promotional timeframe, you'll end up with interest payments again once the period ends, thus putting you into more debt.
Does a balance transfer affect my credit score?
Yes, balance transfers will affect your credit score in a few ways. At first, your score may drop a few points because of hard inquiries and the transfer itself may increase your single-card utilization rate. But this is temporary.
Paying down your balance reduces your overall debt, which will ultimately raise your score as your credit utilization rate decreases.
Is a balance transfer right for you?
If you have high credit card debt, a balance transfer can be an excellent way to save money on interest and help you pay down your debt faster. However, before you apply, consider your options. A transfer may not be the best route if you have a low credit score, or your financial situation won't allow you to pay off the entire balance before the promotional period ends.
If you do get approved for a balance transfer, be sure to keep up with payments on both cards until the transfer is complete and the old card is paid off.