Did you know you can use a 0% balance transfer card to pay off your existing card debt faster? Balance transfer offers are all the rage these days, as credit card companies work overtime to attract new cardholders by offering very good deals on certain balance transfer cards.
But what exactly is a balance transfer, and what does it mean for you? Here I list 4 balance transfer basics that you should understand before you transfer a balance.
1. What is a balance transfer? When you spend money on your card and don't repay it in full, you end up with a balance, or money that you owe to your card issuer. You will have to pay interest on this balance in the form of an Annual Percentage Rate, or APR. The rate can be as low as 8% annually or less on some credit cards, but an average APR is more like 15% to 25%, with some cards charging as much as 35%. You can cut your costs big time by transferring your balance to a card with a low interest rate. When you make a balance transfer to a new card, the new card's issuer fronts the money to pay off your old card's issuer. You can now pay off your balance on the new credit card's terms.
If you have excellent credit then you should have no trouble getting a credit card with a 0% intro APR period for balance transfers.
2. Fees can be avoided. Most credit cards charge you a fee every time you transfer a balance. This is normally 3% to 5% of the amount you transfer. If you transfer a $5,000 balance, a 3% fee of $150 adds a significant expense. But there are a few special credit cards that are designed specifically for people who want to transfer and pay off a balance, and if this is your primary reason for getting a new card then you will want to get one of these.
3. Balance transfers are not unlimited. With the exception of a few specialized credit cards, a credit limit is generally applied to all credit cards. This credit limit is the maximum amount of money you can borrow from your credit card issuer, and is determined by the credit card you get as well as your credit history. Since transferring a balance to a credit card means that you are borrowing the amount of that balance from the new card issuer to pay your old card balance, your balance transfer cannot be higher than your credit limit.
For example, if your new card has a credit limit of $10,000 then you will not be able to transfer more than $10,000 of balances to that card, or approximately $9,710 plus the $290 fee if you are transferring to a card with a 3% balance transfer fee.
4. Closing old card accounts can hurt your credit score. Be aware that your credit history, which accounts for 15% of your credit score, is based partly on the age of your accounts, so it may be wiser to keep old card accounts open after transferring balances to a balance transfer card. Carrying balances that total more than 30% of your total available credit (from all your cards) can negatively affect your credit score. The more credit cards you have, the higher your total available credit will be.
Getting a new credit card for your balances will increase your total available credit if you keep your old card accounts open as well. As you pay off your balance, your credit will probably improve since you will be using less of your total available credit. Using a card with a long 0% intro APR (12 months or more) for balance transfers is a good first step, as you can focus on paying off your balance without having to waste money on interest payments.