Why Transfer a Credit Card Balance?
Transferring a credit card balance allows you to move a balance from one card to another, usually at a lower interest rate. The process is simple. When you apply, you also input the details of the balance you wish to transfer, including the account number and the amount of the transfer.
Note: One of the best reasons to transfer balances is to take advantage of a lower interest rate offered by another lender.
Fees and Features of Balance Transfer Cards
All cards that offer balance transfers require a balance transfer fee, and most offer promotional periods with 0% or low-interest rates for varying lengths of time, and these features can be quite similar. But you will want to consider other matters. Fees may not be imposed until after 60 days or so, but they often start immediately and are added to the outstanding balance. You can expect to pay between 3% to 5% of the transferred amount.
It’s also important to know what the interest rate will be once the promotional period ends. Also, assess any other benefits and features that the issuer may provide, such as rewards, cash back, no annual fees, and sign-up bonuses.
At best, the promotional period should be long enough to pay off the transferred balance before the regular interest rate kicks in. The longer the period, the better. And if that’s not available, choosing a card with the lowest regular annual percentage rate can save you money in the long run.
How to Transfer a Credit Card Balance
Typically, the new credit card issuer will initiate the balance transfer process to your credit card as soon as your application is approved. Your credit limit must be sufficient to accommodate the balance you are transferring; otherwise, you may be able to transfer only part of that debt.
Note: You may also be able to transfer a balance over the phone or online after your credit card account is set up, depending on the issuer.
Some Restrictions May Apply
Lenders impose certain restrictions on transfers by putting some limits in place. These restrictions can vary from company to company, but some are common.
Limits on Transfers: There may be a cap on the debt you can transfer, usually around $5,000, though some lenders may approve larger amounts. This cap can be a one-time limit, proportional to your credit limit, or it may reset monthly.
Timely Payments: You may be denied a balance transfer if you are late on payments with your current lender.
Cash Back and Rewards: You typically cannot earn cash back or rewards points on transferred balances, only on new purchases and transactions.
Accounts with the Same Lender: You usually cannot transfer balances between cards or accounts that you have with the same lender.
Some Issues with Balance Transfers
The balance transfer process does not occur as quickly as making a purchase on a credit card. It can take a few days to several weeks to complete the transfer process. Continue making your regular monthly payments on your old credit card until your online statement shows a zero balance, which indicates that the transfer has officially occurred.
Do not ignore billing statements before that time under the assumption that your balance has been transferred. You may miss a payment and end up with late fees and late payment entries on your credit report if the transfer has not happened yet and your payments are still due until it does.
It may take you longer to pay off the transferred balance if your new credit card balance includes purchases. Typically, the credit card issuer applies larger amounts of the minimum payment to the balance with the highest interest rate until that balance is paid off. After that, overpayments above the minimum will be applied to the next highest interest rate balance, and so on.
Note:
Let’s assume you have a credit card with a balance of $1000: $500 of the balance is purchases you made at an interest rate of 20%, and the other $500 is a balance transfer at an interest rate of 0%. Let’s also assume that the minimum payment due is $25. If you make a payment of $100, the first $25 will be applied to the transfer balance and the remaining $75 will be applied to the more expensive purchase balance. This could delay the final payment date of your transferred balance.
When a transfer might not be effective
Let’s say you owe $5000 on one card with an annual interest rate of 17%. You are approved to transfer this balance to another card with a promotional period of 12 months with no interest. That’s great – but perhaps only if you can pay off the balance during those 12 months.
This translates to monthly payments of over $416 for a year (without balance transfer fees), which may not be feasible if things are already tight. Otherwise, you might end up paying more than you were on the old account, depending on the balance transfer fees and the annual interest rate of the new card once the promotional period ends.
Let’s assume the regular annual interest rate on the new card is 25% after the promotional period, and the balance transfer fee is an additional $250, or 5% of the amount transferred. You will end up paying more on this loan in the second year than you were paying before the transfer, assuming you did not significantly reduce the $5000 balance in the first year.
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Source: https://www.thebalancemoney.com/credit-card-balance-transfer-basics-960195
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