A balance transfer is when a credit card user pays down existing debt with a new credit card, thus transferring the original debt to the new card and shifting the borrower’s repayment obligation from the original lender to the bank or credit union providing that new card. It’s important to note that transferring a balance doesn’t pay off the debt or reduce the amount owed, but it does pay off the original lender.
Many credit card companies restrict which debts qualify for a balance transfer to their cards. All major credit card companies allow balance transfers between credit cards, though none allow transferring a balance between two of their own cards. Depending on the issuer, credit card balance transfers can also work with debt from car loans, student loans, small business loans, payday loans, mortgages, and HELOCs.
On the surface, a balance transfer seems like a win-win situation when you’re in debt. But just because a credit card allows balance transfers doesn’t mean doing one is a good idea. A balance transfer only works in your favor when the debt can be paid off at a lower cost than it would be otherwise.
How much will a balance transfer cost?
Step one of a balance transfer should always be figuring out if it will benefit you, so you’ll want to know how much it will cost. To figure out the cost, you’ll need to know the new card’s balance transfer fee, its balance transfer APR, and its regular APR. You’ll also need to know how much you can afford to pay toward your soon-to-be-transferred balance each month. A balance transfer calculator can help you crunch the numbers.
Hidden costs of balance transfers
The true cost of a balance transfer isn’t hidden, per se. But when you’re rushing to save on interest while paying down a debt, some costs can get overlooked. Namely, the balance transfer fee and the regular APR. Many cards have a 0% APR intro period on balance transfers as a sign-up perk, but will still charge a balance transfer fee. And the card’s regular APR will kick in after any intro period has expired.
Balance transfer fees—one-time fees charged at the time the balance is transferred—are about 2.6% on average, but some credit cards charge as much as 5%. This fee can end up being a significant expense, so be sure to convert the percentage into dollars based on your debt.
Can a balance transfer ever be free?
There are a few credit cards offering both a 0% APR intro period on balance transfers and no balance transfer fee. That’s the only way to avoid paying anything for a balance transfer (as long as you pay it off before the intro period expires), so it’s worth finding out if you qualify for one. These credit cards are only available to people with good credit or better.
A few more things to think about:
It’s good to have a repayment plan beforehand. Use a balance transfer calculator to find out how long it will take to pay off your debt and how much that will cost you in fees and interest.
Know the timeline of a balance transfer. Many balance transfer credit cards have low promotional APRs. But some also require you to request the transfer or make sure the balance posts to your account within a certain number of days or months after opening an account in order to receive the promotional APR. If you’re opening a new credit card account, a balance transfer takes about 3 weeks to post on average, so make sure to take that into consideration.
Also, continue to make at least minimum payments to your original creditor until the transfer is completed. This will keep you from being accidentally classified as late, which could hurt your credit score. If this results in your original creditor receiving more in payment than you owed before the transfer, you can send a written request for a refund by mail. The creditor is legally required to send it within 7 days of receiving your request.
The full amount of your request may not be approved. There’s no guarantee that you’ll get approved for a credit limit high enough to fit your entire debt, if your transfer request is even granted at all. If your balance transfer request is denied, you’ll either be denied completely or a partial payment will be made on your behalf, depending on your card’s issuer. Some will invite you to reapply for a lower transfer amount.
Keep your old account open. It’s worth noting that closing the old account after you’ve transferred a balance can negatively affect your credit score. So it’s best to leave the old account open if it’s not costing you any money.
Crunching some numbers beforehand will save you money that would otherwise be spent on interest and fees, so it’s well worth the preparation.
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