What is a Balance Transfer?

Updated on April 9, 2024

A balance transfer is one method people use in order to make a transaction. However, many don’t know what exactly these transfers are, and why they would pick this type of transaction over another. Are you in the same situation? If so, then this article will answer your questions and let you find out if balance transfers are the right method for you.

What Is a Balance Transfer?

So, what is a balance transfer? It’s pretty simple. A balance transfer is a process that allows you to transfer money from one account to another. Basically, it’s a credit card transaction. This type of transfer is great for people who have a high-interest debt to pay down, as it brings money-saving benefits. If done right, then it can save a lot on interest charges. For instance, if the amount is transferred to a credit card that has a 0% APR offer on balance transfers, then you may pay it off without any interest.

At the same time, there are certain limitations and costs to keep in mind with balance transfers. A balance transfer fee usually applies, and it’s about 3% to 5% of the amount you transfer. Not to mention that if you have a low balance transfer card limit, it may not be possible to transfer the full balance on the card either.

What to Look for in a Balance Transfer?

What’s great about balance transfers is that they allow you to save money. For example, if you have a credit card with a 20% APR and a $5,000 balance, and you pay $250 every month, you would pay it off within 24 months. On top of that, you’ll pay $1,134 in interest. Then, once the cardholder manages to secure a 12-month 0% balance transfer on the new credit card and transfers the $5,000, he/she has a whole year to pay off the balance. What’s amazing is that there is no interest fee to deal with. There will only be a fee for transferring the balance.

It’s also important to be careful when it comes to the details of the transfers. Even after making the transfer with the 0% rate, you will only be able to maintain that as long as you always make the payment on time. Therefore, you need to make the minimum monthly payments on the card before the due date, or else you may not be able to maintain the benefit.

Also, you’ll have to see what interest rate the new card has. In some cases, it could be higher than the one your balance gets on your current card. So, it’s best to be aware of this beforehand.

Other aspects to pay attention to include the amount of time the 0% rate is available for, as well as whether you can pay off the transferred balance during that time. In case it isn’t possible, you should know what interest rate you’ll pay after this.

What to Avoid in a Balance Transfer

You should avoid transferring any balance in case no 0% offer or low-rate interest rate offer applies. It will cost you a lot of money in the long-run, and you don’t want that.

On top of that, you may want to know that if you don’t have a good credit score, or if your history contains late payments or bankruptcies, your transfer may be declined.

How to Do a Credit Card Balance Transfer

Do you want to perform a credit card balance transfer? If so, you will find out that it’s not difficult to do this. What you have to do is apply for a card first. Make sure you apply for a card that has a 0% introductory APR offer when it comes to balance transfers or use that offer on an already existent card.

Make sure that your credit score is in top condition first – preferably a good or excellent credit score. Also, you should know that it’s not possible to do same-issuer transfers, so don’t use the same issuer for the card balance transfer.

Once you get a card, you can start the balance transfer. This can be done using your phone or via the Internet. Offering some information about the debt that you plan on transferring will be necessary. This often includes the account information, amount of debt, and the issuer name. Convenience checks can also allow you to start balance transfers, but you have to make sure you know what the interest is going to be and whether it will count as a balance transfer or not.

Once you start the balance transfer, wait for it to get approved. It may take around two weeks, although sometimes it’s longer than that. Usually, the issuer is going to directly pay off your old account. Then, the old balance and balance transfer fee are going to appear on the new account.

Next, you have to pay down the balance on the new card. This involves making monthly payments.

Important: Beware the Grace Period

The grace period refers to the time between the end of the credit card billing cycle and the due date of your bill. You don’t have to pay interest rates when making purchases during this period. Usually, it lasts at least 21 days, but it’s more common to see 25-day grace periods.

However, a lot of people are unaware of the fact that the grace period applies only in case the cardholder has no balance on the card. Then, having any balance coming from promotional balance transfers will affect the grace period if no minimum payment is made on a monthly basis. When there is no grace period, the purchases you make on the new card after performing the balance transfer are going to gather interest charges.

There are situations when a company doesn’t give clear information regarding the grace period for purchases after a transfer has been made. In that case, it’s always best to avoid this option and look for a different one, where terms are explained in detail and you always know what to expect. Always look for options where you have the 0% offer for balance transfers. However, make sure to not use the card for purchases until you pay off the balance. You could also settle for a credit card with an introductory APR of 0% for the same number of months on both new purchases and balance transfers.

Transferring to Existing Cards

You can also perform balance transfers with an existing card. But this is not always the best decision since if there’s a balance on that existing card, the transfer may only increase it.

On top of the balance increase, your credit utilization ratio may be affected too. This ratio contributes to your credit score a lot, especially if it goes past 30%. So, make sure the transfer will not lead to this.

Conclusion

We hope that this article has answered your question – “What is a balance transfer?”. Balance transfers can be great for saving some money as long as a 0% APR offer is also involved. Make sure you make the right decision, so you don’t have to pay an atrocious amount of interest.

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Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

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