A balance transfer can be an appealing option to get better interest rates or APR. They may potentially help borrowers save money when they pay off their debt. Balance transfers can also help consolidate several bills or types of debt into one account for easier management of payments. Transferring several balances onto one credit card may help borrowers gain a better idea of how much they owe and budget for the monthly payments.
In this guide, let’s delve into the world of balance transfers to identify what a balance transfer is and how they may potentially help borrowers manage their debt more effectively.
A balance transfer is a type of credit card transaction that allows borrowers to move debt from a credit card or loan to another credit card. Many balance transfer credit cards offer a period of 0% APR, which may help borrowers repay their debt quickly because interest will not build on their balance while the 0% period is in effect. The length of the 0% offer depends on the provider and card, but typically is between 9 and 21 months.
With a balance transfer, if borrowers can pay more than the minimum payment each month, they may save money on repaying their debt by reducing the balance that is subject to interest or by paying off a balance before interest applies.
If borrowers are considering a balance transfer, here are some general steps to take:
Most providers will charge balance transfer fees. This is the fee for transferring the balance from one card to another. This is typically between 3% and 5% of the transfer amount but can vary between providers.
For example, if a borrower were to do a balance transfer of $5,000 from a high-interest rate credit card to a 0% APR card that had a balance transfer fee of 3%, the breakdown of their balance transfer would be:
Balance transfer fee = $150
Total balance on new balance transfer credit card = $5,150
It is also important for borrowers to evaluate the introductory APR period, which is often 0% for the first 9–21 months, and the interest rates after this period. If there is still debt on the card after the promotional period, the interest rate will then be applied to the debt.
Here are some things to consider before applying for or making a balance transfer:
There are many reasons why a borrower might want to do a balance transfer. Potential benefits include:
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There are some potential drawbacks and risks that borrowers should consider when doing a balance transfer. These may include:
While balance transfers may provide a solution to curbing interest charges and potentially make it easier to pay down debt, it’s important to remember that any balance left on the card after the promotional period will begin accruing interest. Anyone seeking to use a balance transfer card should be sure to only spend within their means and develop a plan to pay down their debt.
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