What is Balance Transfer?
The balance transfer process allows you to move the outstanding credit card balance from a card that charges a high interest rate to another card that has a lower interest rate. Ideally, the balance is transferred to a promotional credit card with an annual interest rate of 0%, which will not charge any interest for a specified period – usually between nine and 21 months. This gives you some time to pay off your balance without accruing heavy interest charges.
However, once the promotional period ends, you will be subject to the card’s standard interest rate. The average standard interest rate for credit cards is currently over 20%, according to Bankrate’s CNET.
However, credit card interest rates can be higher than that. A high-interest rate will increase your balance and reduce your monthly payments, making it harder to eliminate your debt. The lower the annual percentage rate, the faster you can pay off your debt and save more money in the long run.
However, balance transfers typically involve fees. Credit card companies usually charge a fee ranging from 3% to 5% for balance transfers, with a minimum fee of $5 or $10. However, in cases where you transfer your balance to a card with a 0% interest rate, a 3% balance transfer fee may be less than what you would pay in one month’s interest on a high-interest card. There are credit cards with no balance transfer fees, but their promotional interest periods are usually much shorter, so you need to weigh the pros and cons of your specific situation.
Can you transfer credit card balances repeatedly?
It is possible to transfer your balance to a promotional credit card with a 0% interest rate again after your current card’s promotional period ends. But you will need to maintain a good credit score to qualify for a series of promotional interest rate cards and be disciplined about making all minimum payments on time and timing the transfers carefully.
If you can take advantage of 12 months of promotional 0% interest, a 3% balance transfer fee may be a low price compared to interest charges on a regular credit card or personal loan. The promotional interest rate on a credit card can be one of the cheapest ways to finance your debts.
However, if you are transferring your balance to a card without a promotional 0% interest rate, it is unlikely to be worthwhile. The balance transfer fees may be higher than the interest you would have paid. It’s also worth noting that every time you apply for a new credit card, your credit score can be affected slightly. And every credit card you acquire increases the likelihood of accumulating more debt.
Should you transfer the balance multiple times?
Transferring a credit card balance multiple times carries risk. While it can help reduce the cost of paying off debt or financing a large purchase, it can quickly become a disaster if it results in increased total debt. If you do not have an excellent credit score and are not confident in managing your finances, it may be better to apply for a personal loan to consolidate your debt and simplify your monthly payment responsibilities.
Can you transfer more than one balance to a 0% interest card?
You can transfer multiple balances to one credit card with a promotional 0% interest rate, as long as your credit limit can accommodate the combined balance (plus transfer fees). This can help simplify your monthly payments, especially if you already have several credit cards with outstanding balances.
Advantages
Advantages and Disadvantages of Balance Transfers
Advantages:
– Low-cost financing with promotional interest rates.
– Expected minimum payments.
– Faster debt repayment.
Disadvantages:
– Balance transfer fees.
– Accumulation of new debt.
– Multiple credit card applications can impact your credit score.
What to Consider When Transferring Balances
If you are considering using multiple balance transfers to pay off credit card debt, here’s what you should keep in mind:
– Do you have a plan to pay off your current debt? You should have a timeline to pay off your balance before applying for a new credit card.
– Calculate whether a balance transfer will actually save you money. If you don’t intend to transfer your balance to a card with a low enough interest rate, it may be better to try and make larger payments in the short term rather than paying balance transfer fees.
– Can you avoid accumulating new debt? If you are still making purchases and your credit card balance is still increasing, the benefits of balance transfers may not be very helpful. This could lead to a cycle of ongoing balance transfers and accumulating more debt. Additionally, new purchases may not qualify for promotional interest rates.
– Monitor your credit score. Opening new credit cards in a short timeframe will reduce the age of your credit accounts, which may impact your credit score. On the other hand, additional credit cards may increase your available credit. If you are disciplined enough not to use the new credit card, you may reduce your credit utilization, which could improve your credit score. Be sure to check your credit score regularly for changes.
– You still need to make minimum payments. Although you may not accrue interest during the promotional balance transfer period, you still need to make at least the minimum payments each month. Most promotional interest offers come with large late payment fees and high penalty interest rates if you miss payments. Depending on the terms from the issuing bank, you may start accruing interest on your balance immediately if you miss a payment.
FAQs
Can you transfer balances between cards back and forth?
As long as you adhere to the rules of promotional periods, you can transfer balances back and forth between cards from different banks. However, credit card companies won’t allow you to take advantage of balance transfer offers between cards from the same bank. In theory, you can transfer balances between cards from different banks multiple times, but balance transfer fees may start eating into any savings that a lower interest rate may offer.
Can you have two balance transfer cards?
Yes, you can have two balance transfer cards. If transferring the entire balance to one card would put you close to your credit limit, you can split the balance transfer between two cards. Or, you may want to take advantage of varying promotional periods to strategically plan your payments and pay off your debts.
How does a balance transfer work if you already have an outstanding balance?
You can use the promotional balance transfer offer from your credit card company even if you carry a current balance, but it’s important to read the details of the offer. For example, don’t expect the promotional interest to apply to your current balance. You are likely to continue accruing interest at the current annual percentage rate (APR) of your credit card. You will only qualify for the promotional interest on the amount you transfer from another card, and you will need to pay balance transfer fees on the amount you are transferring. After accepting the offer, you will need to provide your credit card company with the information of your other credit card account, including the name of the credit card company, your account number, and the amount you wish to transfer.
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Written by: Jaclyn DeJohn
Editor: Jaclyn DeJohn
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Written by: Tiffany Connors
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Source: https://www.cnet.com/personal-finance/credit-cards/advice/balance-transfers-to-avoid-interest/
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