As a nation, we're in love with plastic money. But it's all too easy to accumulate and carry credit card debt on more than one credit card, which can be a difficult situation for many people to manage.
According to the US Debt Clock, Americans owe more than $1.04 trillion in credit card debt, the third largest debt after mortgages and student loans. In fact, the average American has over $6,600 in credit card debt. More than 60% of Americans struggle to pay their credit card bill in full at the end of each month, leading to high-interest repayments for years.
The good news is that there are some ways to get out of high credit card interest payments and re-organize your financial life. Credit card balance transfer is one of them, which is why it is so important to understand the options available that can be used to reduce your financial burdens.
What is a credit card balance transfer?
A credit card balance transfer allows you to transfer one or more existing credit debts to a new single account with better interest rates or repayment terms than your existing ones. You can only transfer balances that are within the overall credit limit of your new account, which means if your new account has a limit of $10,000, you can transfer balances within this limit only.
Is it a good idea?
Under the right circumstances, a credit card balance transfer is a good idea: You want to lower your current interest rate by shifting the debt to a 0% promotional interest rate. Depending on your total debt, this is what enables you to save hundreds of dollars in interest payments.
A credit card balance transfer makes sense only if you can repay your debt within the promotional period. It is essential to be realistic about your ability to repay the debt.
How to transfer your credit card balance
Here is a step-by-step process for credit card balance transfer:
Choose the right offer: If you have received a credit card balance transfer offer that comes with 0% interest rate, make sure to check the transfer fee, penalty charges in case of missed payments, length of the promotional period, and interest charges that will prevail beyond the promotional period.
Provide details of your existing credit accounts: Choose credit card accounts that you want to settle with this balance transfer and provide these details to your new credit issuer. It is best to transfer balances with the highest interest charges. The total settlement will depend on the credit limit of your new account.
Pay monthly bills until the new card issuer completes the transaction: You must continue to make monthly or weekly payments before your new credit card issuer completes the transfer to avoid new fees with your existing card issuer. In some cases, it could take up to three weeks to complete the transaction.
Pros and cons of the credit card balance transfer
- A credit card balance transfer allows you to consolidate your credit card debt to a single monthly payment, making it easier to manage.
- You can save money on interest payments with the lower promotional period interest rates.
- You will have to pay a balance transfer fee, which could be up to 5% of the total debt transferred.
- The low or 0% promotional interest rates are available for a limited period only, so you have to be prepared to take the maximum benefit of this period.
- You will require a good credit score to qualify for a credit card balance transfer.
The Bottom Line
A credit card balance transfer gives you a second chance to manage your finances responsibly. While it can provide temporary relief to help you gain some ground in repaying your debt, it is critical to address the root cause of your financial troubles.