A balance transfer enables you to move debt from a high-interest credit card to that with a lower interest rate. Many issuers will offer a promotional 0% APR for the first six to 18 months of using your new card.
However, even if the interest rate on a balance transfer card isn’t much better than what you’re already paying, you could still benefit from transferring your outstanding debts to a new card if it comes with better bonuses or rewards.
Keep in mind that when you transfer balance, regardless of the interest rates, welcome bonuses, and rewards, you’ll still be carrying a monthly balance, and you’ll need to cover at least the minimum payments each month before the due date. If you make new purchases with your balance transfer card, you’ll need to cover those debts as well.
You can transfer debt from one credit card to another, but depending on the issuer, you can also transfer from other loan accounts – student and payday loans, car loans, and others.
You should also know that you cannot transfer a balance from one credit card to another from the same issuer. So if you have a balance on a Scotiabank credit card with a high-interest rate, for example, you cannot transfer the debt to a Scotiabank credit card with low interest.
If you have a 0%APR for six to 18 months, it would be in your best interest to pay off your debts in full before the end of this promotional period. Otherwise, you’ll likely encounter APRs of over 29.99%, depending on the issuer.
How Does a Balance Transfer Work?
While it’s called a “balance transfer,” you’re not actually transferring the balance between cards. In reality, you’re using one credit card to pay off debts from another card.
In most instances, you’ll receive a balance transfer check made out to the card issuer you want to pay off. However, the transfer can be completed online or via phone as well. You’ll need to provide the balance transfer card issuer with your account information and amount owed.
If you want to transfer a balance of $1,000 from your Scotiabank credit card to a BMO credit card, for example, you’ll need to provide BMO with your Scotiabank credit card number and account details, and state that you want $1,000 paid to that account.
Once the balance is transferred, you’ll have to make on-time monthly payments to BMO until you pay off the $1,000 plus any additional fees.
When transferring the balance, make sure to check your new credit card limit. Your balance cannot exceed your limit, so issuers will have maximum balance restrictions.
Balance transfers typically take 1-2 business days to complete, but they can sometimes take much longer, going up to several weeks. Make sure to cover at least the minimum payments until the transfer shows up on your account. Otherwise, you risk encountering late payment fees and other penalties.
Balance Transfer Card Fees
The fees you’ll encounter will vary by the issuer. The best balance transfer cards will help you save money by offering three zeroes:
- 0% introductory APR
- 0% balance transfer fee, and
- $0 annual fees
If this isn’t possible, look for a card with at least a 0% introductory APR and no annual fees. Without these benefits, charges can quickly add up and make your new credit card more expensive than it needs to be. It’s better to pay a small one-time balance transfer fee than encounter high-interest rates and annual fees.
Balance transfer fees will typically be between 3% and 5%. If the issuer doesn’t have a cap on the fee amount, you could benefit from transferring large debts.
With balance transfer fees, you’ll encounter all the typical credit card fees; cash advance fee, ATM withdrawal fee, new purchase APR, late payment fees, and more.
It’s crucial to avoid late payment fees even if they’re affordable. Being late on your payment could cancel benefits such as 0% APR, rendering any balance transfers useless if your goal was to save money.
Things to Keep in Mind When Transfering Balance
While many issues will market their 0% balance transfers, 0% APR, and $0 annual fee, it’s not a guarantee that you’ll get these benefits. If you have a poor credit score, you might not be eligible for these bonuses. So, always read the fine print and see whether you meet the requirements for these promotional offers.
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Also, keep in mind that the balance transfer could impact your credit score. Primarily, the credit card issuer will make a hard inquiry into your credit report to see whether you qualify for the balance transfer, and this will temporarily lower your score.
Secondly, you could harm your score if your balance is too high compared to your new credit limit. Let’s say that you’re transferring a balance of $3,000 to a credit card with a limit of $5,000. Your credit utilization ratio will jump to 60%. As a general rule of thumb, you’ll want to have a credit utilization ratio of less than 30%. Otherwise, your credit score will be reduced.
Another thing of note is that your account history’s length also has an impact on your credit score. If you close an old account and open a new one, your score can drop by a significant amount.
The Bottom Line
Balance transfer cards can be useful for consolidating debts and saving money, but you need to be responsible when using them. Read the fine print to ensure that the terms and conditions are favorable, and calculate how much you’ll be saving if you transfer.
Always compare and contrast balance transfer cards from different issuers to find the one best suited for your needs, and take into consideration how the transfer will impact your credit score.