What is a Balance Transfer Credit Card?
Meet a financial product that’s just as simple as it sounds. A balance transfer occurs when you move debt – the full or partial balance – from one credit card to another. The card that receives that transfer is the balance transfer credit card.
If you use your credit cards frequently, you might find that you need to move a balance from one account to another – or you might just be able to save some money by doing so. That’s where a balance transfer credit card comes into play.
We know it sounds tempting, but before you take the dive, make sure you understand what you’re getting yourself into with a balance transfer credit card.
How Does a Balance Transfer Credit Card Work?
Balance transfer credit cards usually come with a low interest rate – sometimes even as low as 0% – but typically for a set period of time. Common promotional periods range from 12 to 18 months. The savings that come with the promotional interest rate are the biggest benefit of a balance transfer.
Those blank checks from your credit card company that state you can use them to pay off another credit card, or to buy something, work the same way. These special offers usually give the same promise of a very low to 0% interest rate for a certain number of months.
If you qualify for a 0% APR balance transfer card, and you pay down your existing debt during that promotional period, you’ll be paying off your debt without accruing any interest. Depending on what your debt looks like, that can save a whole lot of money.
But what does it take to qualify for an interest rate that good? Read on.
Like all good things, a great rate for a balance transfer comes at a cost – and that cost is a strong credit score. To qualify for a 0% APR balance transfer card, set your sights for a score around the 670+ range. If you’re not there yet, check out some tips for building your credit.
Don’t get discouraged. Even if you don’t qualify for a 0% APR, any card with a lower rate than what you’ve got currently could save you money on interest. For example: a balance transfer credit card with a 10% APR, for example, could still save you money in the long run if you’re currently working with an APR of 24.95%.
How Much Could I Save With a Balance Transfer?
That’s the biggest question when it comes to the topic of refinancing debt, so let’s talk about how much you could really save by making the most of a balance transfer opportunity. Say you have a balance of $10,000 on a credit card with an APR of 25%. All of a sudden, you get approved for a new card that offers a 0% APR for 12 months. What a deal! Naturally, you decide to pay off your $10,000 balance with it, so you can miss out on 12 months of interest payments.
And boy, will it work. By transferring your balance to the 0% card, you could save around $2,500 on interest in the first year alone. That’s a big chunk of change.
But what if you didn’t get approved for a card with a 0% APR? What if 10% was the lowest rate you qualified for? Would refinancing still be worthwhile?
Our answer: absolutely. Even with an APR of 10%, you could still save up to $1,500 in one year by simply transferring your balance.
Something else you’ll have to keep in mind when determining whether you should try out balance transfer credit card is the credit limit. Will the amount you’re offered work for your needs? Is it worth it? For example, if you’re trying to refinance $15,000 worth of debt but only qualify for a $10,000 credit limit, you won’t be able to refinance all of your debt.
In some cases, you may not be able to transfer all your debt even if it is equal to your credit limit. Some cards have a maximum transfer amount that could be 70% to 100% of your approved credit limit – meaning that even if you have a $10,000 credit limit and $10,000 of debt, $7,000 is the most you could refinance.
Even if you can’t transfer all your debt, a balance transfer could still be worth it – you still have the potential to save a lot of money on interest. As long as you understand that you may not be able to refinance all your debt with a balance transfer credit card, you’ll be in good shape.
Balance Transfer Fees
Before you decide if a balance transfer card is right for you, there’s one more thing to consider: the fees that card issuers charge for balance transfers. The amount you pay in fees could have a big impact on how much you can save.
Typically, balance transfers come with a fee that is anywhere from 3% to 5% of the transferred balance. If you’re refinancing a card with a $10,000 balance, for example, you can expect to pay between $300 and $500 in transfer fees.
Before you take the jump for a balance transfer, be sure to weigh your potential savings against the cost of the fee. Something like a $500 balance transfer fee could be the deciding factor on whether refinancing with a balance transfer is a smart financial move.
Timeframe and Rate Changes
Not all balance transfer offers are created equal. The terms can vary from card to card – and even from month to month once you’re approved. If you transfer your high-interest debt to a card with a low or no-interest APR promotional offer, remember that the low-interest period isn’t forever. After the promotional period ends, your rates could hike back up – and your balance will start accruing interest, fast.
Balance transfer cards also often have a variable interest rate, which means that once the promotional period ends, the amount you pay in interest could change from month to month. Which can be good– some months you might even save on interest. Other months, you may have to spend a bit extra.
However, before you decide on refinancing with a balance transfer card, check out other options, like a personal loan. The more informed you are, the more confidence you’ll have that you’re making the smartest choice for your situation.