How Does a Balance Transfer Work and How Does it Help Me Save Money?
Did you open a credit card with the intention to pay it off each month but now you're carrying a large balance with a high interest payment?
If this is you, you're definitely not alone. In fact, a recent study found that since the pandemic, 55% of Americans have been carrying a balance on their credit cards every month with an average interest rate of almost 17% APR!
However, there is a money-hack called a balance transfer to help you pay off your balance faster while also saving a lot of money in interest.
What is a Credit Card Balance Transfer?
A credit card balance transfer involves moving high interest credit card debt from one credit card to a different credit card that has a lower interest rate – ideally a card with an introductory rate near 0% APR.
The amount of debt remains the same after the balance transfer, however with the lower interest rate, you now have the opportunity to pay less interest or even pay zero interest when you pay off the entire balance before the introductory period ends.
How Does a Balance Transfer Actually Work?
Here are the general steps you can expect when deciding to go forward with a balance transfer:
Find the right card
Start the transfer
Pay off the balance
1. Look for the right balance transfer credit card. Before applying for a balance transfer card, identify your current interest rate and balance. From there, determine how quickly you could pay off the entire balance if you could lower your interest rate to 0%. Next, look up your credit score with all three credit reporting agencies. This will come in handy when determining which balance transfer credit card to apply for.
2. Apply for the card. When it comes time to apply for your new balance transfer card, the higher credit score will result in a better balance transfer credit card. Typically the best offers will go to those with a FICO score of 690 or above. Also, apply for a balance transfer card with the best introductory rate and the lowest balance transfer fee.
You cannot transfer a balance between two credit cards that are issued by the same bank or credit union.
3. Start the balance transfer. You have the option to initiate the balance transfer either online or over the phone. You will need to provide a few key pieces of information including where the current debt will be transferred from, the amount of debt, and the account information for the current debt.
Some financial institutions will also allow you to do a balance transfer on other types of debts (more about this later). When transferring other forms of debt, the financial institution will issue checks that can be used to "pay off", which is really just transferring the debt from one place to another.
4. Pay off the entire balance. Remember, transferring a balance does not remove the debt amount, but instead lowers or removes the interest rate for a period of time. Whatever the timeline is for your new introductory period, utilize that time to pay down the balance in full before the introductory rate expires and jumps back up into the double digits again.
How Much Money Can I Save with a Balance Transfer?
Before doing a balance transfer, it's important that you calculate how much the balance transfer will cost versus how much you will be saving.
A balance transfer may cost money to initiate the transfer, typically anywhere from 2% to 5% of the balance transfer amount. However, it’s possible to find banks and credit union that offer free balance transfers for their credit cards.
Let's assume you have a current balance of $10,000 on your credit card with 17% APR. After looking for a new balance transfer credit card, you get approved for a card that offers a 0% introductory rate for 21 months with a 3% balance transfer fee.
Current Balance: $10,000 with 17% APR
After being approved for a new balance credit card:
Balance Transfer Fee
To pay off the $10,000 balance during the introductory period: $491 per month
Balance Transfer fee
What Should I Consider Before Doing a Balance Transfer?
There are definitely a few things to remember when applying for and initiating a balance transfer.
First, always remember that a balance transfer does not pay off any of your debt, but instead just moves your debt from one bucket to another. The debt is still there and you still have to pay it off if you want to enjoy the savings from a lower rate during the introductory period.
Second, keep in mind that when you apply for a new balance transfer card, this will cause a hard pull on your credit, which could have an initial negative effect on your credit and your credit score.
Lastly, do not continue to charge on your balance transfer credit card. Although it is a balance transfer card, it is also just another credit card that you can charge to and increase your balance.
How Much Can I Transfer?
The amount you can transfer to your new balance transfer credit card will be the credit limit set for your new credit card. However, you unfortunately won't know what the new credit limit will be until after you apply for it.
The financial institution issuing the credit card will look at many factors when determining your credit limit. This could include your current debt-to-income ratio (DTI), your payment history, your overall credit score and your income.
Pro Tip: The CARD Act of 2009 allows someone applying for a credit card to use their household income instead of their own personal income. If you are part of a household where both partners work, you can use your household income to improve the chances of a higher credit limit.
What Types of Debt Can I Transfer to a Balance Transfer Card?
All financial institutions will have their own policies for which types of debt can be transferred to a balance transfer credit card.
Credit Card Debt
You can count on all balance transfer credit cards to allow the transfer of credit card debt from your current financial institution to the balance transfer credit card you are applying for. However, you most likely will not have the ability to transfer a balance between two cards issued from the same bank or credit union.
Depending on your approved credit limit and your auto loan, some card issuers will allow auto loan debt to be transferred over to the balance transfer credit card. However, this is rarely a good plan since auto loan interest rates are generally much lower than credit card interest rates.
Unless you are positive you can pay off the balance within the introductory period, transferring an auto loan balance to a credit card is a bad idea.
Many balance transfer credit cards will allow an unsecured personal loan to be transferred to a balance transfer credit card. However, it is unlikely you can move the balance from a personal loan to a credit card from the same financial institution.
Also, only choose this option if you're positive you can pay off the balance on your personal loan before the introductory period ends. It's actually much more common for people to transfer their current credit card debt from a credit card to a personal loan because personal loans often come with much better rates.
Very rarely is this a good plan. Student loans will often have much lower rates than credit cards. Also, there are many different student loan repayment plans to help borrowers manage and pay down their balance. If the borrower were to transfer their balance to a credit card, they will lose out on those payment programs.
This also is rarely a good financial move for the borrower. A home equity line of credit (HELOC) has a much lower interest rate than a credit card because the HELOC is secured by your home.
What If I Don't Get Approved for a Balance Transfer Card?
If you apply for a balance transfer credit card and then you're not approved, don't panic. You still have some other great options to help you save a ton of money when it comes to paying less interest.
Consider a Home Equity Line of Credit (HELOC)
By taking your unsecured debt and moving it to a secured-type debt with a HELOC, you are transferring risk away from the bank or credit union and onto you.
This results in the financial institution giving you a much lower HELOC interest rate than compared to your higher interest credit card rate.
Consider a Personal Loan
If you don't own a home, then you could also consider a personal loan which typically has a much lower interest rate than a credit card.
When applying for a personal loan, it's best to work with a local bank or credit union in your area. When working with a local credit union like OneAZ Credit Union, you can sit down with a personal banker and have a face-to-face conversation about your current circumstance when looking for approval.
Quick Tips When Choosing a Balance Transfer Card
- When choosing a balance transfer card, always look for a card that doesn't have an annual fee. With the amount of balance transfer cards available to you without an annual fee, you don't need to choose a card with a fee.
- Look for the longest introductory period. You may notice some offers come with a 12-month introductory APR while others have an 18-month period. That extra six months will come in handy when you're trying to get the balance paid in full before the introductory rate ends.
- Always look at the balance transfer fee. A $10,000 balance with a 2% balance transfer fee versus a 5% balance transfer fee is a savings of $300.
- Stay away from credit card reward cards. Remember, your goal is to save money and get out of debt — not bonus points or miles towards a free flight.
The biggest mistake borrowers make when doing a balance transfer is believing they actually did something to lower their debt amount. Remember, a balance transfer just moves the debt from one bucket to another bucket and then starts the countdown for you to pay off the balance in full.
As soon as the balance transfer is complete, it's time to roll up your sleeves, get to work, and pay off your credit card balance in full.
Chris “Peach” Petrie is the founder of Money Peach. Money Peach partnered with OneAZ to provide free financial education to members across the state. To learn more about OneAZ’s partnership with Money Peach, click here.
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APR = Annual Percentage Rate