Credit card balance transfers may help you save hundreds or thousands of dollars on interest payments. You hear the commercials and get the junk mail, but still have no idea how or why a “balance transfer” is a good idea. So let us take a look at what they are, how they work, and how to use them effectively!
Credit Card Balance Transfer – Save on Interest!
Simply stated, a credit card balance transfer is when you transfer existing credit card debt from one card to another. You might want to do this because you have credit card debt and the balance transfer offers a lower rate or a 0% introductory rate for a period of time. Interest rates are determined by the credit card provider.
Credit card companies often use the idea of a balance transfer to promote their credit cards to attract new customers. Usually, you can transfer a balance up to 80% of the new card’s credit limit.
How it Works To Pay Down Debt
Let us take a look at a common scenario.
- You currently have credit card debt because you can not fully pay it off every month and interest rate of 15%. This unpaid amount credit card debt is referred to as the “balance”.
- A credit card company offers you a 0% balance transfer for 12 months.
- You will pay 0% interest instead of 15% on your debt, until the deal expires.
- If you pay off the remaining debt before the balance transfer promotional period is over, you won’t pay any interest!
You now can pay off your outstanding credit card balance faster because you do not have to pay any interest for 12 months. Previously, each monthly credit card payment went towards 15% interest and paying off part of your debt. After the balance transfer, your monthly payment will have gone down, since you do not have to pay any interest. The trick is to take advantage of the 0% interest period and pay off as much debt as possible! Another way of looking at it is as a loan with no interest.
Here is the Catch
Remember the 0% or low interest rate for a balance transfer is only for a period of time (usually 12-24 months). After the initial period, the interest rates will go up. Also, balance transfers are usually offered to customers with a clean credit record, so it is definitely not an option for everyone. You likely will not be allowed to transfer a balance from another card within the same banking company.
Even if you can transfer the balance, there may be some fees associated with doing so – likely between 1-3% of the total balance. Make sure to read the terms and conditions so that you can avoid any hidden fees associated with credit card balance transfer. Finally, applying for too many credit cards or credit card balance transfers can give you a bad reputation when companies run credit checks.
Maddy Osman is a freelance SEO copywriter with a penchant for the thrifty. If you’re looking for a good deal and need some help finding the best price, get in touch on Twitter: @MaddyOsman