Definition and example of balance transfer:
Balance transfer is a type of transaction that moves a credit card balance from one credit card to another.
Key takeaways:
- A balance transfer moves a credit card balance from one credit card to another.
- Cardholders may save money if the new annual interest rate is lower than the previous annual interest rate.
- A balance transfer fee may apply.
How does a balance transfer work?
A balance transfer involves paying off the balance of one credit card using another credit card. After providing your credit card information, including the name of the card issuer, account number, and transfer amount, the card issuer takes care of the balance transfer.
The transferred balances are separated from other types of credit card balances on your statement and may incur a different interest rate.
Credit card issuers typically offer a limited-time promotional interest rate for new cardholders making a balance transfer from another credit card. Any promotional rate on a balance transfer must last at least six months, unless you are late with a payment by 60 days or more.
Here’s how a balance transfer works:
Let’s say you currently have a credit card balance of $5,000 with an 18% annual interest rate. Then you get approved for another credit card with a promotional rate of 0% on balance transfers for 12 months. When you’re ready to do the balance transfer, you inform the new credit card issuer of the account details. Within a few weeks (sometimes sooner), the old balance is added to your new credit card.
Alternatives to balance transfers
Balance transfer is not the only way to free up credit card debt or save money on interest. Instead, you can use the following options:
- Personal loan: You can pay off your credit card balance using a personal loan instead of a balance transfer. The terms of the loan depend on your credit rating and other financial factors, but you may save on interest if you qualify for a lower rate. If a high loan amount is approved, you can consolidate multiple credit card balances into one monthly payment.
- Home equity loan or line of credit: If you are a homeowner with sufficient equity in your home, you can open a line of credit or get a loan to pay off your credit card debt. Interest rates are usually lower than other types of loans and credit cards, allowing you to save on interest. However, the application process is not as quick as for a personal loan or balance transfer, as your home needs to be assessed first.
Note: Utilizing your home equity carries the risk of losing your home if you are unable to make monthly payments.
Balance transfer fees
Most credit cards charge a balance transfer fee, typically ranging from 2% to 5% of the transferred amount. If you are transferring a balance of $1,000, the balance transfer fee would range from $20 to $50.
Credit cards may set a minimum balance transfer fee of $5 or $10. The higher percentage between 2% to 5% of the balance or the minimum transfer fee will be applied.
Utilizing a balance transfer can help you pay off your balance faster and save money on interest. However, costs can rise due to fees. There are also some other scenarios where balance transfers may not be advantageous.
Advantages and disadvantages of balance transfers
Advantages:
- You may be able to save money on interest.
- You can pay off your balance faster.
Disadvantages:
- Balance transfer fees may negate the interest savings.
- You may need a good credit score to qualify for the best deals.
- You may
- Your credit limit may not be sufficient for your current balance.
- The promotional interest rate is temporary.
Balance Transfer Requirements
To transfer a balance, you will need an open credit card that allows balance transfers. When applying for a new credit card to transfer a balance, the card issuer will review your application information and credit history to determine your eligibility and set your credit limit.
Some new credit card applications allow you to request a balance transfer during the application process. Otherwise, you can contact customer service after your card is approved – or for a credit card you currently have – to initiate the balance transfer. You will need the account number and the current balance for the transfer you wish to make.
Note: A balance transfer may take several days to complete. Continue to make the minimum payment on your credit card until the balance transfer is finalized to avoid late payments and fees.
You can stop the balance transfer if the credit card company has only approved part of your balance transfer. This can happen when the approved credit limit is insufficient to transfer the full amount.
If you wish to cancel the balance transfer, act quickly. You have 10 days from the date the credit card company sends you the opening statement to cancel the balance transfer.
Source: https://www.thebalancemoney.com/what-is-a-balance-transfer-5212138
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