If you find it challenging to manage credit card debt, a balance transfer credit card could be a beneficial option. Numerous credit cards provide promotional interest rates as minimal as 0% on balance transfers, facilitating the reduction of your debt without accruing additional interest. It’s essential to note that there is usually a 3% to 5% balance transfer fee, and once the introductory period concludes, the card’s standard annual percentage rate (APR) will come into effect.
Here are key insights to help you determine if a balance transfer is the right choice for you.
What is a balance transfer credit card?
A balance transfer involves shifting debt from one credit card to another with a lower interest rate. Many balance transfer credit cards provide a 0% APR during an introductory period, typically spanning 12 to 21 months. Throughout this period, no interest is applied to the transfers, allowing each payment to directly reduce the balance.
Depending on the credit card issuer, it may be possible to transfer more than just credit card debt. For instance, Capital One permits the transfer of balances from auto, personal, and student loans. The ability to transfer multiple balances exists, provided you adhere to the balance transfer limit. Typically, you can transfer up to 90% of your credit limit, which is determined by factors such as income, credit score, current debt, and other considerations.
Balance transfer fees
Typically, when transferring balances to a new card, you’ll incur a balance transfer fee, which is then incorporated into the new card’s balance. This fee usually ranges from 3% to 5% of each transferred balance, with a set minimum fee, such as $5 or $10. While certain cards may have no balance transfer fees, it’s common for cards offering extended promotional periods to have associated fees.
click here – Best Gas Credit Cards 2024
How much can you save with a balance transfer?
Balances on credit cards with high APRs can quickly accumulate due to daily interest accrual. The card issuer calculates daily interest (APR ÷ 365 days) and adds it to your balance each day. This creates a compounding effect, where the interest from one day becomes part of the balance for the next, leading to a rapid increase. Transferring a balance from a high-interest card to one with a 0% APR can result in significant savings.
For instance, if you have a $5,000 balance on a card with a 20% interest rate and make a $100 minimum monthly payment without additional purchases, it would take 109 months to pay off, with a total interest of $5,840. Now, imagine transferring the $5,000 balance to a card offering a 0% APR for 21 months. With the same $100 monthly payment, your balance would be $2,900 at the end of the introductory period. Subsequently, it would take an additional 40 months to fully pay off the balance, incurring $1,095 in interest—$4,745 less than if you had kept the balance on the high-interest card.
If your budget allows for larger monthly payments, you could eliminate interest entirely. For example, paying $238 every month would enable you to settle the entire $5,000 balance in 21 months. This approach represents an optimal strategy to leverage the benefits of a balance transfer credit card and minimize overall interest costs.
How does a balance transfer work?
The process of completing a balance transfer varies among credit card issuers, but the following are the fundamental steps to guide you through it:
- Apply for a balance transfer credit card:
Opt for a balance transfer credit card that offers an introductory 0% APR, a generous promotional period, low or zero balance transfer fees, and does not have annual fees. - Request a balance transfer:
Initiate a balance transfer when applying for the card or afterward through the new card issuer’s online portal or by phone. Alternatively, you may have the option to use a convenience check provided by the new credit card issuer. Ensure that the transfer is categorized as such (not a cash advance) and is subject to the anticipated interest rate. - Confirm the transfer:
Be patient, as it may take several weeks for the new credit card issuer to settle your existing card or loan. Refer to the terms and conditions to understand the timeline specific to your card. During this period, continue making minimum payments on your existing account until you verify that the balance has been completely transferred. This precaution helps you avoid unexpected interest charges and late fees on your current card. - Pay off your balance:
Despite having a 0% APR, it’s crucial to adhere to the required minimum payments on time each month. Late payments or missed payments may jeopardize the introductory interest rate. Consider setting up autopay for timely payments. If your budget permits, aim to pay enough each month to clear the balance before the promotional period concludes, preventing any interest charges from accruing.
click here – Citi Premier® Card 2024
Should you do a balance transfer?
Engaging in balance transfers can prove to be a beneficial strategy for managing debt. However, it is crucial to carefully evaluate the advantages and disadvantages before determining if a balance transfer credit card aligns with your financial goals.
Pros of Balance Transfer Credit Cards:
- Save on Interest:
Avail yourself of low or 0% interest rates to potentially save hundreds or even thousands of dollars. Maximizing savings is achievable by settling the balance before the conclusion of the promotional period. - Accelerated Debt Repayment:
During the introductory period, no interest accrues, allowing your payments to directly reduce the principal. This facilitates faster debt repayment with less effort. - Consolidated Payments:
Simplify your financial management by consolidating multiple balances onto a single balance transfer credit card. This consolidation reduces the number of payments you need to track.
Cons of Balance Transfer Credit Cards:
- Balance Transfer Fees:
The majority of balance transfers come with fees ranging from 3% to 5% of the transferred amount, typically with a minimum of $5 to $10. For instance, transferring $5,000 could incur a fee between $150 and $300. - Temporary Low Rates:
Once the introductory period concludes, the card’s regular interest rate takes effect. This implies that any remaining balance becomes subject to a higher interest rate. - Risk of Accumulating More Debt:
The availability of another credit card may tempt individuals to increase their debt, potentially worsening their financial situation. A prudent approach involves refraining from using the card for additional purchases until the transferred balances are entirely paid off.
What are the alternatives to consolidate debt?
If you’re uncertain whether a balance transfer suits your needs or if you don’t meet the eligibility criteria for favorable terms, alternative options such as personal or student loans may be worth considering.
Personal Loans:
A personal loan functions as an installment loan, allowing you to borrow a fixed amount and make regular monthly payments until the loan is fully repaid. It can serve as a viable solution for financing substantial purchases or consolidating debt with high-interest rates.
Various lending institutions, including traditional banks, credit unions, and online lenders like Upgrade and Upstart, offer personal loans. Keep in mind that interest rates can vary, influenced by factors such as your credit score. Improving your credit score can enhance your eligibility for more favorable personal loan rates.
Student Loans:
For educational expenses, private loans from online lenders like Ascent cater to both undergraduate and graduate students. These loans can be beneficial if federal student loans do not cover your complete funding needs.
Private lenders often provide larger loan amounts, potentially covering the entire cost of attendance, and may offer flexible repayment terms. While interest rates on private student loans can be higher compared to alternative college funding options, individuals with an excellent credit history may qualify for competitive rates.
Making the most of a balance transfer
As per a recent Bankrate survey, over a third (35%) of U.S. consumers maintain credit card debt from one month to the next. Among them, 43% admit to being unaware of the interest rate they are currently paying. This lack of awareness is concerning, especially given that the average APR for credit cards accruing interest, as of Feb. 2023 (the latest available report), stands at 20.92%—the highest recorded since the Federal Reserve began tracking rates in 1994.
The primary advantages of opting for a balance transfer credit card lie in the potential savings and expedited debt repayment. It’s crucial to recognize that using the new card for additional purchases only amplifies total interest and extends the time required to settle the balance. To maximize the benefits of a balance transfer credit card, refrain from making new transactions and aim to clear the balance before the promotional APR period concludes.
For detailed information on rates and fees associated with the balance transfer, it is recommended to refer to the specific terms and conditions provided by the credit card issuer.
click here – Discover it® Cash Back 2024