Around 60% of Americans with a credit card also have credit card debt. A balance transfer is one of the ways to deal with paying the interest on that debt.
But what is a balance transfer exactly, and what are the costs associated with it? Are you interested in this move, but aren’t sure if this is the right step for you? Do you know how transferring your balance will affect your credit score?
No worries, we got you covered. In this article, we will thoroughly explain the concept and everything you need to know about it.
What Is a Balance Transfer?
The official balance transfer definition is moving debt from one credit card to another. This process doesn’t remove your debt. It only helps you combine multiple payments on a single card or improve your credit utilization ratio.
In some situations, this is the smartest step for the person as it ensures zero interest and better benefits. Transferring balance, however, also comes with some unexpected fees and drawbacks. So, you need to have a clear strategy before you opt in.
How Does Balance Transfer Work?
There are several steps involved. First, you should do your research and decide what balances you want to transfer and where. Then, you should request the transfer through your new credit card issuer and wait until it’s completed.
The process itself is straightforward, and most of the work, after you submit a request, is done by your card provider. They will perform the necessary checks and verify your information. Balance transferring is possible both via phone and online. You just need to provide details for both cards alongside the amount you wish to transfer.
Once all this is done, there is a waiting period that ranges from 2-10 business days. The best way not to miss the transfer is to keep an eye on both accounts.
Can You Do Balance Transfer to an Existing Credit Card?
Yes, it’s possible to transfer a balance to an existing card. The only issue is increasing the card’s already existing balance. Since the promotional 0% APR won’t affect the current balances, their interest rate will be charged until you pay them off.
Here’s an example. You have a card with a balance of $1,000 and APR of 15%. You transfer $2,000 with 0% APR for the first 12 months. Within those 12 months, you succeed to pay off the transferred balance of $2,000. The initial $1,000 and their 15% APR remain active and generate monthly interest of $15 totaling $180.
We also want to mention the credit utilization ratio here. Let’s say your card has a spending limit of $10,000 and a current balance of $2,000. This sets your utilization at a positive 20%. If you, however, transfer the new balance of $2,000, you will increase the utilization ratio to a negative 40%.
Is It a Good Idea to Do a Balance Transfer?
It depends on why you are doing and under what terms. You should go for this step if you transfer a balance to a card with 0% interest for at least 12 months. This is the only way you can save money by transferring a balance.
Another situation where this move makes sense is to lower your credit utilization. This ratio is one of the most significant credit score factors and shouldn’t be over 30%. So, many people transfer balances from one card to another to achieve the desired utilization ratio. This step can instantly improve their FICO score.
What Are the Benefits of Balance Transfer?
These are the main advantages of transferring balances from one card to another.
- Saving cash on 0% APR during the promotional period.
- Moving balances to a card with better terms and benefits.
- Consolidating credit card debt.
- Achieving the desired credit utilization ratio.
Please note that for you to get all these benefits, you should get one of the best balance transfer cards. Otherwise, you may end up paying higher APR and hefty fees.
When to Transfer Credit Card Balance?
Transferring credit card balances makes sense only when you avoid increasing your interest debt. So, do it when you’re spending too much money on interest and when your credit score needs a boost. Make sure to transfer only to a card with 0% interest and no hidden fees.
What Is a Balance Transfer Fee?
This is the fee you pay when you transfer credit card debt from one account to another. This fee usually ranges between 2-5%, and is never below $5. The exact amount charged depends on the issuer’s policy and the amount transferred. Still, it mostly ranges from $20 to $50.
For example, let’s say that the credit card balance transfer fee is 4%. If you want to transfer $1,000, then you will have to pay a $40 fee.
What Is Balance Transfer APR?
The interest rate on transferred balances is commonly known as the balance transfer APR. Since people usually transfer balances to save money on interest rates, issuers will offer promotional APRs with limited duration. For instance, you can get a 0% balance transfer APR for the first 12-21 months.
Make sure to read the APR balance transfer terms for the promotional period and beyond. The latter will come into effect once the promotional period of 12-21 months passes. This new APR may be equal or even higher than your current APR. Hence, you should avoid it by paying off your credit card debt during the zero APR promo period.
One of the most shocking credit card debt facts is that American households pay $1,300 a month on interest rates. A share of this amount goes to balance transfer APR, as well. So, smart planning and spending are crucial.
How Long Do Balance Transfers Take?
Card issuers typically inform users that they need up to 14 business days to complete a transfer. On average, however, the process takes anything between 2-10 business days. Everything depends on your card provider’s policy and the complexity of your case.
Can I Do Balance Transfer to Checking Account?
This is possible, but not through a traditional transfer. You can do it by getting a cash advance from your credit card. Then, upload the funds to your bank account. Also, some banks, like the U.S. Bank, let you transfer balances from credit card to checking account online.
Another option is to use balance transfer checks issued by your card provider. Just deposit the check into your bank account and voila.
Please note that a balance transfer into a checking account from a credit card isn’t a smart move. It results in increased credit card debt and worse utilization ratio. Also, cash advances start accruing interest rates as soon as withdrawn. Plus, they have processing fees, too.
Do Balance Transfers Hurt Your Credit?
Yes, they affect your credit score in three ways. First, we have a credit utilization ratio. Second, we have credit age. New accounts decrease your credit age and lower your FICO rating. Finally, we have hard inquiries, which reduce your score and are necessary for opening a new card.
Credit utilization is your total credit card debt versus your approved limits. It impacts your FICO grade by 30%. Let’s say your utilization ratio on one card is 50%, and it negatively affects your score. You decide to transfer part of that balance to another card. The move results in achieving an overall utilization ratio of 25%. This will have a positive impact on your credit score.
Credit age is the average length of your credit history. It includes all your cards and affects 15% of your FICO score. Since it’s better to have a longer credit history, getting new balance transfer credit cards will negatively impact your rating. Still, credit age is less significant than credit utilization. So, transferring your balance can often be a smart move for obtaining a good credit score.
Before a card issuer approves your credit card application, they will do a hard credit score check. One hard inquiry can lower your grade by 5-10 points, meaning, it is a direct and certain negative impact on your score.
Does a Balance Transfer Count as a Purchase?
No, transferring balances between cards doesn’t count as a purchase. This means you won’t receive any cashback offered on purchases made with that credit card.
For instance, the issuer gives 1.5% cashback on purchases, and you transfer $1,000. You will not receive the $15 bonus for transferring credit card balances.
How to Use Balance Transfer Checks?
Credit card companies send such checks to consumers offering them to transfer balances from one card to another. Users fill out the checks with the necessary details and then send them back for approval. Before doing so, it’s highly recommended to read all the applicable terms.
It’s common for financial institutions to send such offers to Americans. Often, these checks will get you a promotional APR of 0%. Still, it’s critical to read when the promotional APR expires and what APR is applicable afterward. Also, transferring balance includes additional charges. Make sure to get informed about those as well.
A balance credit card transfer check is not free money card issuers give to you. It’s an opportunity to pay off your debt and save cash on interest rates. It also, however, can become a serious issue unless you’re able to pay off your balances on time.
Is There a Zero Interest Balance Transfer?
Yes. Most offers for credit card balance transfer feature zero interest for a limited period which varies between 12 and 21 months. In some cases, it’s more than enough for consumers to pay off their debt and save cash on APR.
What Happens to Old Credit Card after Balance Transfer?
Your old credit card remains in service, and it’s not automatically closed. If you wish to close a credit card, you must contact the issuer to do so. It’s best, however, to avoid using that credit card because that will render the transfer useless.
Also, it’s not recommended to close the old credit card because this can hurt your credit history age. In return, this will negatively impact your credit score. If the old card has no debt associated with it, it’s best not to use it but keep it open.
Is There a Downside to Balance Transfers?
Yes, there are several drawbacks. These include ending up with higher APRs, high fees, acquiring even more debt, and hurting your credit score. Some of these, however, can be avoided if you have a good strategy before applying for a credit card balance transfer.
After the promo period of zero interest expires, which can be between 12-21 months, the issuer may apply higher APR. You should accept transfers only if you can pay off the balances before the promo period expires. Also, keep in mind that card providers charge a transfer fee of 2-5% of the balance.
Remember, card issuers must assess your creditworthiness by checking your credit score. They do this by making a hard inquiry. Hard pulls go on your credit record and lower it by up to 10 points for the next 12 months.
How Many Times Can I Do a Balance Transfer?
There is no limit on the number of balance transfers you can make. Applying for a second or third transfer balance, however, is not always a smart move. Each new request results in a hard pull, which hurts your credit score.
What Does Creditor to Pay Balance Transfer Mean?
Your new credit card issuer is your creditor that provides you with a service. They will pay your balances on the old card and transfer the debt to your new card. This doesn’t mean that you are free from debt. You still need to pay monthly statements.
What Is the Minimum Payment on a Balance Transfer?
The minimum payment associated depends on your new balance transfer credit card issuer policy. Stats show that providers set the minimum payment at 1% of the amount transferred. So, if you move $10,000, the minimum payment will be $100.
These aren’t general rules and may vary. So, make sure to ask the card provider on their terms to know what to expect. Also, the point of balance transfers is to pay off your debt without expensive APR. This means you should aim at paying more than the minimum and cover your balances within the promotional period.
Can You Do a Balance Transfer for a Family Member?
Yes, transferring balances for a family member or any other person is generally possible. That said, each card issuer has individual policies and some may not allow it, while others may apply stringent rules associated with it.
Balance transfers for family members or friends are just like a regular one. You enter all the necessary details on the form and submit the request. Once the transfer is processed, the person’s balance will become your debt.
Credit utilization, hard inquiries, and late payments can all hurt your credit score. So, make sure you can pay off any balances you transfer to your credit card.
Balance Transfer vs Cash Advance Explained
The main difference lies in the completion time. The former takes at least several business days. The latter gives you access to instant cash. Both involve processing fees, but the size of those charges varies.
To transfer your balances, you must submit a request with your new card issuer. A cash advance, on the other hand, is withdrawn from your current credit card from any ATM. With a credit card balance transfer, you move debt from one place to another. With cash advances, in contrast, you increase your household debt. It’s interesting to note that, per the American household debt stats, credit cards and mortgages contribute the most towards family debt.
Does a Balance Transfer Close the Account?
No. To close any bank or credit card account, you must personally request this. This means your new card issuer can pay off your old debt and open your new account. The old account remains active until you close it.
Balance Transfer Vs Personal Loan Explained
Transferring credit card balances is moving debt from one credit card to another one. A personal loan is borrowing funds from a lender and then using it as you wish. While the maximum balance transfer amount is equal to your balances, a personal loan can be higher.
Both concepts have benefits and drawbacks. Which option works for you depends on your needs and circumstances. Balance transfers ensure promotional 0% interest rates, while this isn’t the case with personal loans. On the flip side, a personal loan can get you more money and freedom.
Another thing to keep in mind is the repayment period. Personal loans usually give you more time to repay them. That said, you have better chances of getting approved for a transfer than for a loan with good terms.
Does a Balance Transfer Count as a Monthly Payment?
No, transferring balances doesn’t count as a monthly payment. You need to pay all monthly statements associated with both the old and the new credit card. Otherwise, these will be recorded as late payments, which can ultimately lower your FICO score.
Balance Transfer Bottom Line
If you’re paying large amounts each month on credit card interest rates, you should consider whether to transfer a balance. Otherwise, this step may not be the best for you and your finances.
A balance transfer comes with both benefits and drawbacks, as well as fees. It’s essential to know all of these before deciding whether to move forward with transferring your balances. With the right strategy and accurate information, you may end up saving hundreds, if not thousands, of dollars on APR.