Yahoo Finance Guide to Credit Card Balance Transfers
Whether you're aggressively tackling your credit card debt or simply want to save a few bucks on your monthly bill, a credit card balance transfer can help you reach your goal.
However, a balance transfer isn't the best option for everyone. Here's a look at how it works and how to perform a balance transfer if you decide it's the right move for you.
How a Balance Transfer Works
"A credit card balance transfer is when a person shifts credit card debt from one [credit card] to another," says Tia Sabawi, vice president of consumer lending at Xceed Financial Credit Union. You can transfer as much debt as your new card's credit limit.
Balance transfers generally can't be made between cards from the same issuer but occur from one issuer to another. Usually, says Sabawi, the goal is to take advantage of a lower interest rate. In fact, to attract new business, credit card companies will often offer an introductory zero percent annual percentage rate on balance transfers for new customers. This rate can normally last from 12 to 21 months. [Read: The Best Balance Transfer Credit Cards of 2018.] If you carry a balance on a high-interest credit card, transferring the balance to a new card with a lower rate can help you not only pay less interest but also pay off the balance faster. Often, credit card companies will charge a fee to transfer a balance -- usually about 3 to 5 percent of the total amount transferred. So if you transfer a balance of $1,000, for example, expect to pay $30 to $50 in fees. "Each issuer will have different fees and terms associated with their balance transfers," says Sabawi, noting that it's important to compare your upfront costs with the long-term interest savings to be sure a transfer is worth it. Even better, "Some issuers will offer a zero-dollar fee for your first transfer or transfers made in the promotional period," she says. Balance Transfer Pros and Cons When it comes to credit card balance transfers, there are a few undeniable benefits. But those benefits don't always outweigh the drawbacks. You'll have to do the math to decide if a balance transfer is worth it. Biggest benefits of transferring a balance Save money: The main reason to transfer a balance is to save money on interest, thereby giving you more monthly cash flow and the opportunity to pay off your debt faster. "By transferring your current debt to a single low-interest card, you'll position yourself to make a single [smaller] payment each month, giving you the opportunity to cut down on your debt and enjoy a little more breathing room each month," says Sabawi. She adds that if you're considering a balance transfer, it's also a great time to reassess your budget and find ways to keep yourself out of future debt. [Read: The Best Rewards Credit Cards of 2018.] Improve credit: A nice side effect of paying down your credit card debt is an increase in your credit score. Your credit utilization makes up 30 percent of your score -- and experts recommend keeping your balance under 30 percent of your credit limit. However, Sabawi says, "While a balance transfer is a good tool for improving your financial position and could net you a higher credit score, it's important not to make a habit of transferring your debt." That's because balance transfers could become a crutch that eventually lands you back in debt if not used responsibly. Why think twice about a balance transfer? Incur fees: Depending on the difference between your old and new interest rate, a balance transfer may or may not actually save you money. The only way it's worth it is if the interest savings outweigh the transfer fee. Again, look for cards that don't charge a balance transfer fee to ensure it's a financially sound move. Potentially end up in more debt: Taking advantage of a balance transfer requires discipline. If instead of paying off your balance faster, you use your "savings" to spend more, all the benefits are clearly lost. "You should run the numbers to confirm you'll be able to pay off the debt based on the terms, otherwise you might end up back where you left off," says Sabawi. How to Transfer a Balance If you decide that a balance transfer will help you reach your financial goals, going about it is fairly simple. 1. Prep your credit. The first thing you should do before actually submitting a balance transfer request is make sure your credit score is in good shape. "Don't make the mistake of trying to transfer your balance when you have poor credit," warns Natasha Rachel Smith, global head of communications and public relations, and consumer affairs expert at rebate website TopCashback. Not only is good credit needed to qualify for a card in most cases, but "the best terms are only available to those with a good or excellent track record," she adds. 2. Research the best offers. Since interest rates and fees vary across different issuers and cards, it's important to shop around and find the best deal for your credit profile. That includes the lowest fees, the lowest rate, and in the case of zero percent APR offers, the longest promotional period. "The longer you have to repay at this cheaper rate, the more manageable and achievable it will feel to reach the goal of a zero-dollar balance," says Smith. [Read: The Best Cash Back Credit Cards of 2018.] 3. Crunch the numbers. Again, you'll want to make sure that the cost of transferring a balance doesn't make the interest savings a wash. Also, keep in mind that "the fee is determined by the bank and is typically based on how much money you'd like to transfer," says Smith. That means the bigger your balance, the bigger the fee. 4. Submit an application. Once you've settled on the best credit card, it's time to submit an application to open an account and transfer a balance. This can be done online through the card issuer's website or via the bank's customer service phone number. You'll need to be prepared with the account information for the balance you're transferring, including the card number and exact amount you want transferred. You'll also need to provide personal details, including your address, income and Social Security number. 5. Double check everything's set. Once you're approved, the new credit card issuer will facilitate the balance transfer. Usually, this takes seven to 10 days; keep in mind that until the transfer goes through, you still owe that amount on your old card and are responsible for interest charges and payments. Once the transfer has taken place, you should follow up to be sure the correct amount was transferred. And if you're thinking about closing your old card, "I recommend reconsidering," says Smith. "While it is tempting to close the card you just paid off, canceling could damage your credit score." That's because you will lower the total amount of credit available to you -- immediately increasing your credit utilization. If you do keep your old card open, make sure that no fees, interest charges or recurring payments were charged after the balance transfer took place. You can set up account alerts to keep tabs on any activity. 6. Set up automatic payments. Finally, set yourself up for success by paying down your balance every month and avoiding new debt. It can help to set up automatic payments from your checking account so you don't forget. "Old habits are hard to break, especially when it comes to overspending," says Smith. But if you go through the process of transferring a credit card balance, you want it to be worth the trouble. "You have to focus on paying the old debt on time every month and eliminating your balance," she says.
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