If you have had problems with credit card debt, or know anyone who has, then you’ve probably heard about balance transfers before. These are seen as a solution to credit card debt because they help customers to get back on track with repayment. But how exactly do they work, and why should you consider one? This guide explains the answers to some of the very common questions about balance transfers. It includes the pros and cons of balance transfers.
What is a balance transfer and how does it work?
When you transfer high-interest debt from one credit card to another card with a lower interest rate, this is called a balance transfer. A balance transfer does not mean that you have paid off the debt. It simply means that you can continue to make repayments, just with lower interest charges. For example, you could transfer a credit balance to a new card with 0% interest for an introductory period. If you pay off the balance before the 0% period expires, then you have effectively taken out a loan without any interest. You could transfer balances between credit cards, store cards, and other loans. You can transfer some or all of the balance, or even multiple balances from several cards.
What are the benefits of a balance transfer?
The primary benefits of balance transfers are the consolidation of your debts and lower interest rates. This makes managing debt repayments much easier. It also means that you are more likely to pay off the balance faster if you are saving money on interest charges. You can see how much you owe in total and plan your repayments better. It will certainly be simpler to just have one credit card and repayment date to keep track of. Balance transfers often come with competitive promotional rates (like interest down to 0%). Your minimum monthly payment will be lower.
How does a balance transfer affect your credit score?
A balance transfer will affect your credit score, one way or the other. Applying for one can reduce your credit score in the same way applying for any other credit card would. Cancelling your other cards once you transfer balances can also have a negative impact. This is because lenders prefer to see older accounts still open to show a longer credit history. However, when you pay off your debts faster following a balance transfer, this will improve your credit score. You will be using less of your available credit, which will boost your rating. One of the problems with balance transfer cards is that you often need to have a good credit score to be eligible for the best balance transfer offers.
What fees does a balance transfer have?
A common misconception about balance transfers is that it is totally free to transfer your balance. This is rarely the case. Instead, the provider of your balance transfer card will usually charge you a fee. This will normally be between 1%-5% of the amount that you are transferring. If there is no transfer fee, then the introductory rate will probably be for a shorter period. Check the fee before applying so that you can calculate the impact on your savings from lower interest. The savings should be larger than any fee to make a balance transfer worth it. This is most often the case.
How do you do a balance transfer?
Applying for a balance transfer will require research. You should try to only apply for one at a time, which you would most want to use and are most likely to be accepted for out of your options. Make sure that you can afford to make repayments in full before the expiry of the introductory offer. Factor any balance transfer fees into your repayment calculations. When you are ready to apply or to transfer the balance, you can usually do this online. You may need to call a helpline for assistance or pre-application enquiries. Many providers will allow you to check your eligibility before applying to avoid damaging your credit score unnecessarily. The new lender should notify your old provider.
How long do balance transfers take?
The speed of a balance transfer depends on the provider. Some of them can arrange for your transfer to happen on the following working day when they accept your application. However, it could take several days for the transfer to complete due to the necessary checks. You might have to keep in contact with both your old and new providers to make sure that there are no problems with the transfer. Always check the terms and conditions so that you do not accidentally invalidate the introductory offer. They might specify for you to complete it within a certain time frame.
What should you watch out for with balance transfers?
Though there are obvious benefits to balance transfers, they only work if you use them properly. There are some things which you need to be wary of when looking at balance transfers. Always check the terms and conditions to see what you need to do to maintain the promotional rate. For example, if you are not able to make the minimum monthly repayment, they may remove the offer and start charging higher interest. Check how long the promotional rate lasts for to ensure that you can pay off the balance before it increases to the regular rate. Avoid making new purchases on the balance transfer card. You want to get rid of that debt, not add to it. Purchases may have a higher interest rate than the balance transfer as well. Avoid cash withdrawals for the same reason. Make sure that your balance is within the limit for the transfer and that you can complete the transfer within the specified time window.
How do you use a balance transfer credit card?
Transferring the balance from your old credit cards won’t cancel them automatically. You should keep them open to improve your credit score, just do not be tempted to spend any more with them. Only check on them for fraud. The least that you need to do with your new balance transfer card is to pay the minimum amount each month and avoid spending or withdrawing any cash. If you can afford to pay more than the minimum, then you will clear the balance faster. You could set up automatic payments to help with this. Budgeting is crucial to make sure that you can clear the debt before the promotional period ends. Multiple balance transfers aren’t an option, because they will damage your credit score and reduce the likelihood of you getting further loans. If you act responsibly then it should be fine.