What Is A Balance Transfer And How It Works

Whether you are looking to consolidate your debt or get a more affordable payment, a balance transfer could be the ideal option for you. A balance transfer is a common banking tool used to manage debt by many Americans. However, many people may not realize that they pay more in interest than on the balance of their loans each month. By consolidating your debt into a credit card or loan with a lower interest rate, you will be able to reduce your debt balance faster each month. While a balance transfer is an excellent financial tool, it is imperative that you fully understand how it works before deciding whether to sign up for one. In this article, we will look at what a balance transfer is, how it works, and how it could benefit you. 

What is Balance Transfer?

Balance transfers are a means to transfer all or part of the outstanding debt on an existing card account. This is usually done during special periods of time for promotional purposes between credit cards with similar features. The more common balance transfer involves moving balances from unsecured credit cards to ones that offer lower interest rates. The balance transfer process allows you to move debt from one credit card or loan debt to another. Although you will still have to repay the loan, a balance transfer can help you reduce your payments and interest on the debt. Balance transfers do not free you from debt. Transferring a balance usually involves a fee, and there is the possibility of interest payments as well. To entice customers to transfer balances, some banks and credit card companies offer 0% introductory rates. This will let you pay off your debt interest-free. However, a balance transfer is not without its limitations and costs. Transferring balances is generally subject to fees, roughly 3 to 5% of the amount being transferred. Also, when you move a balance during the 0% introduction APR period and have a balance left when the period is over, interest will be due. To avoid this situation, pay down your balance during the interest-free period.

How does a balance transfer work?

A balance transfer is an act of moving debt from one credit card to another. This strategy will allow you to save money and pay off your debt faster. However, you need to be aware of details such as fees, interest rates, and limits on the amount that can be transferred. Let’s take a look at how balance transfers work. 
The exact balance transfer process can vary significantly from issuer to issuer, but the general steps are:

1. Apply for a credit that has 0% introductory APR or use a card you previously owned card that has an introductory APR. The best offers usually require you to have good credit (generally at least a 690 FICO score). 
Keep in mind: Transfers between the same issuer are generally not allowed.  
2. Request a balance transfer. If you are moving debt online or over the phone, you will need to provide details about the debt, such as the issuer’s name, balance, and account information. Occasionally, you can start a balance transfer using convenience checks mailed to you directly by the issuer. Make sure you read the terms to see whether the transfer counts as a balance transfer and how much interest you will pay.
3. Await the completion of the transfer. When the issuer approves your balance transfer, which can take up to two weeks, they will pay off your old account directly. A new account will show your old balance as well as the transfer fee.
4. Pay off the balance. The minute you add a debit to your account, you must pay the minimum amount each month on that account. If you pay the balance within the introductory 0% APR period, you can save a lot of money.

Tips to save money on balance transfers

The main reason to transfer a balance is to save money, not to spend more. The following tips can help you save on interest and fees when you transfer your balance.

Consider a balance transfer card that waives fees: Look for a balance transfer card with a $0 percent introductory fee or one that does not charge a fee at all. The introduction fee-free balance transfer offer is only valid for transfers requested within the first two months.
Be aware of different APRs: Take advantage of the 0% introductory rate for balance transfers (introduction offers range from 12 to 21 months). Remember that after the initial period is over, your APR will change. Say your credit card offers 0% APR for the first 18 months after account opening. However, after 18 months, an APR of 16% takes effect. To avoid that 16 % APRs, pay off your balance before the intro period expires. During the introduction period, if you do not pay off your credit, you may nullify the savings of transferring.
Other types of APRs to watch out for are penalty APRs. Missed payments may result in a penalty APR. In addition, you may also be canceled from the 0% introductory APR offer if you forget or make late payments during the intro APR period. 
Ensure introductory APR applies to new purchases: For balance transfers, a card may offer a 0% introductory APR, but if it does not apply to new purchases, you will pay a different interest rate. Compare the interest charges you will pay versus the rewards you will receive if you use the card for new purchases.
Avoid missing a payment, set up alerts: In spite of a 0% introductory APR on purchases and transfers, regular payments are still required. If you need reminders, you can set an alert. Depending on your monthly payment, you might have to pay more than the minimum to pay off your debt before the end of your introductory period.
Continue making payments. In most cases, requesting a balance transfer is a fast process; however, in some cases, the process can take weeks. The time can vary from issuer to issuer. Therefore, you need to pay the minimum amount on your original debt until you see the transfer in that account.
Expect a hit on your credit: Expect a hard hit on your credit report. This could lower your credit rating, and it cal also reduce your credit utilization and increase your available credit, which would be beneficial to your credit scores.