How Do Credit Card Balance Transfers Work?

How Do Credit Card Balance Transfers Work?

Updated September 21, 2020
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How Do Credit Card Balance Transfers Work?

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A credit card balance transfer may save you hundreds of dollars in interest.

Paying high credit card interest rates can make it seem impossible to get out of debt. No matter how much money you throw toward the card, the balance seems to go nowhere.

That’s where credit card balance transfers can provide a solution. If you’re lucky, you can find a 0% APR credit card that allows you to transfer your balance from high-interest credit cards and pay no interest.

While it sounds like the perfect solution, it’s important to understand how credit card balance transfers work before taking action.

What’s the Process of a Balance Transfer?

First, you must find a balance transfer credit card that suits your needs. Look for one with the longest 0% APR period. For example, some cards give you 12 months with no interest.

If you pay the balance off in less than 12 months, you don’t pay interest on the balance. That’s the best use of a balance transfer card.

If you don’t pay off the balance in full before the introductory period ends, the remaining balance will be subject to the prevailing interest rate, which could be rather high.

Once you find the right card, you provide the credit card company with the information for your other credit card balances and they transfer the balances for you. It could take between 7 and 14 days, so make sure you keep up with your payments on your other cards in the meantime.

What are the Reasons to Consider a Balance Transfer?

It may seem obvious when to do a credit card balance transfer, but let’s focus on the why. Here are the top reasons:

  • You can save on interest
  • You may decrease your credit utilization rate (your balance of outstanding credit to your credit lines, which is a key factor in your credit score)
  • You can consolidate your debt onto one card if you get a high enough credit limit and simplify your monthly payments

What are the Potential Pitfalls of Credit Card Balance Transfers?

Credit card balance transfers sound great, but they do have their downsides:

  • Most credit cards charge a 3% - 5% balance transfer fee
  • It may hurt your credit score if you use up more than 30% of the credit card’s limit with transferred debt
  • It opens up your credit lines on old credit cards, which may tempt you to spend more (unless you close them)

Does a Balance Transfer Close Your Old Credit Cards?

Your old credit cards actually remain open after a balance transfer and that can be a good thing. While you shouldn’t charge them up again, you may not want to close old accounts. Closing the account could bring your credit score down as it will lower your credit age and increase your credit utilization ratio.

So should you do a credit card balance transfer? It can be a good thing, but only if it makes sense for your situation when weighing the benefits against the pitfalls.

Be sure to choose a card that gives you ample time to pay the balance in full and you’ll reap the benefits of the balance transfer credit card as long as you don’t rack up debt on your now empty cards.