A balance transfer credit card is a financial product designed to help consumers manage and potentially reduce high-interest debt. It allows you to move existing debt from one or more credit accounts (most commonly other credit cards, but sometimes even student loans, car loans, or personal loans) onto a new credit card account. The key feature of these cards is often a promotional Annual Percentage Rate (APR), frequently as low as 0%, for a specific introductory period.
What is a Balance Transfer Credit Card?
While there isn’t a separate “type” of card called a balance transfer card, the term describes how the card is used: to consolidate and transfer debt. When debt is moved to this new account, it becomes part of its balance. After the transfer, the card generally functions like any other credit card, allowing for new purchases up to its credit limit, though it’s often recommended to avoid new spending on these cards during the promotional period.
How Do Balance Transfers Work?
The process involves shifting a balance from one or more existing accounts to a new one. The goal isn’t to eliminate the debt, but to secure better repayment terms, most notably a lower or 0% interest rate, for a temporary period.
Choosing a Balance Transfer Credit Card:
When considering a balance transfer, evaluate these factors:
- Promotional APR Periods: Look for the longest introductory period available (e.g., 6 to 24 months). A longer period provides more time to pay down high-interest debt without additional interest charges. The aim is to pay off most or all of the balance before this period ends to maximize savings.
- Standard Interest Rates: After the introductory period, a higher standard interest rate will apply to any remaining balance. If you anticipate carrying a balance beyond the promotional period or plan to continue using the card, a lower standard APR is beneficial.
- Credit Score Requirements: Cards with the most attractive promotional APRs and longer periods typically require good to excellent credit scores. Applicants with lower scores might still qualify but may receive shorter introductory periods or slightly higher promotional rates.
- Potential Fees:
- Balance Transfer Fees: Most cards charge a fee, usually 3% to 5% of the transferred amount (or a flat minimum fee). This fee is added to your new balance. You should calculate if the projected interest savings outweigh this fee.
- Annual Fees: Some cards have annual fees that also need to be factored into the overall cost analysis.
- Transfer Terms:
- Same Issuer Restriction: Generally, you cannot transfer a balance between two cards from the same credit card issuer (e.g., from one Citi card to another Citi card).
- Credit Limit: The total amount you can transfer (including any balance transfer fees) cannot exceed the credit limit on the new card. If your debt is higher than the new card’s limit, you may need to prioritize which balances to transfer.
How to Transfer a Credit Card Balance (Step-by-Step):
- Decide How Much to Transfer: Know your current balances and interest rates to determine the credit limit you’ll need. This also helps in prioritizing debts if you can’t transfer everything at once.
- Apply for a Balance Transfer Credit Card: Most issuers offer online applications. You’ll need to provide standard personal and financial information.
- Initiate the Balance Transfer: During or after the application, you’ll provide details of the accounts you wish to transfer from and the specific amounts.
- Wait for the Balance Transfer to Process: Transfers are not instant and can take up to two weeks. During this waiting period, continue to make minimum payments on your original accounts to avoid late fees or interest charges. Once confirmed, ensure the original accounts are zeroed out if the full balance was transferred.
- Start Paying Off the Balance: Make timely payments every month. While the low introductory APR helps save on interest, consistent on-time payments are crucial to maintain good standing and avoid losing the promotional rate or incurring late fees. Aim to pay off the entire transferred balance before the promotional period ends to maximize savings.
Balance Transfer Credit Card Pros and Cons
Pros:
- Simplify Payments: Consolidate multiple debts into a single, manageable monthly payment.
- Save on Interest: Access a lower or 0% interest rate on your transferred debt, leading to significant savings on interest charges.
- Accelerate Debt Repayment: With more of your payment going towards the principal (instead of interest), you can pay down debt faster.
- Potential to Improve Credit Scores: Responsible use, such as reducing total debt and improving your credit utilization ratio (debt-to-available-credit), can positively impact your credit scores.
Cons:
- Debt Is Still Owed: A balance transfer is a tool for managing debt, not erasing it. The principal amount remains.
- Fees: Balance transfer fees (typically 3-5% of the transferred amount) and sometimes annual fees can eat into potential interest savings.
- Temporary Promotional Rates: The low interest rate is temporary. If the debt isn’t paid off before the promotional period ends, remaining balances will revert to a higher standard APR.
- Potential for Credit Score Damage: A hard inquiry from applying can temporarily lower your score. Mismanaging the new card (e.g., missing payments, incurring new debt) can also severely damage your credit.
- Not for Everyone: If you have poor credit, can’t commit to a payoff plan, or tend to accumulate new debt, a balance transfer might not be the right solution.