If you’re carrying debt on a credit card, a balance transfer could potentially help you save money on what you owe. With most cards, you’ll likely pay interest on any remaining balance from month to month — but the credit card industry is a competitive field, and different cards carry different interest rates. Transferring a balance from one card to another could land you a better interest rate, but you should understand the costs involved to make the proper decision.
What is a Credit Card Balance Transfer?
A credit card balance transfer shifts the amount of debt you owe from one credit card to another. This is usually accomplished in one of two ways: 1) Your new credit card company pays off your old debt directly through an electronic transfer, where the money is exchanged between companies and never crosses your path; or 2) You receive a packet of checks, typically called convenience checks, that you can use to transfer your credit card balance. Simply send a check to your credit card company for the balance you owe as though you were writing it out of your own checking account. If you plan to use a convenience check, confirm that you will receive the balance transfer rate and not the cash advance rate, which is typically much higher.
In some situations, balance transfers could save you money. Let’s say you owe $5,000 on a credit card that carries a 20 percent interest rate. Over the course of a year, you’ll rack up interest charges of $1,000! And if you don’t pay down the balance, the actual amount may even be higher because you’ll be paying interest upon interest. For example, if you have $100 in interest added to your account and you only make a $75 payment, the remaining $25 will begin to accrue interest as well.
A balance transfer helps you avoid this situation, and many credit card companies offer promotional balance transfer rates of zero percent. In the above scenario, this means you could avoid accruing that additional $1,000 in interest over the following year. Just make sure you understand the card’s terms — for instance, the new card could offer a promotional rate that increases after the promotional period ends. Make sure you don’t end up with a higher payment if you can’t pay off your balance in time.
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Balance Transfer Fees
Although there are often no interest charges involved, you’ll probably have to pay some type of fee for a credit card balance transfer, typically ranging from 3 to 5 percent of the amount transferred. If you transfer a $5,000 balance, you’ll likely have to pay a fee of between $150 and $250.
The duration of a promotional balance transfer rate is also limited. A credit card company will usually offer a reduced balance transfer rate for six to 12 months. But you’ll begin accruing interest charges again if you still have a balance at the end of that time, so be sure to pay off your balance before then.
Credit Score Implications
When you open a credit card to take advantage of a balance transfer offer, the new account will show on your credit report. New accounts comprise a percentage of your credit score, so you might lose a few points when you apply, but an additional credit line will also raise the total amount of credit available to you. This may help your score because it reduces your credit utilization, the total percentage of available credit that you’re using.