Balance Transfer: What Is It and How it Works
Are you wracking your brain out trying to figure out how to pay off your debts? Are you paying different interest rates every month from your several credit cards and high-interest debts? Getting a balance transfer for your loans might be the answer.
It’s been proven that balance transfers are safe and simple ways of paying off your debts, especially high-interest ones. Getting a balance transfer moves your credit card debt from one credit card to another to save money.
What is a Balance Transfer?
A balance transfer is a type of credit card transaction wherein your existing loans will be transferred from one account to another. It is a process wherein high-interest debt is transferred from one credit card to a different credit card that has a low-interest rate.
This system is specifically designed to help you pay your debt faster and easier because it allows you to pay your debts all at once. People who are paying loans with high-interest rates will see a dramatic change in saving money, especially if this payment option is done strategically. For example, when a debt is transferred to an account that has a 0% introductory APR offer, it can potentially make you pay your loan interest-free.
Balance transfer loans typically have a low annual percentage rate (APR) that does not change through time. This loan has fixed monthly payments. The money also goes directly to the creditor, unlike in personal loans where the money is deposited to your account.
Balance transfers come in costs and fees. Generally, you have to pay a transfer fee of about 3%-5% of the total value transferred. If you have a lower credit card limit, then there is a risk that you will not be able to transfer your full balance to the other credit card.
Credit card debt is not the only debt eligible for balance transfer loans to your credit card. Many card issuers allow credit cardholders to transfer other types of loans, such as auto loans and personal loans.
How Balance Transfer works
There are different ways of getting a balance transfer, depending on the lender. However, the typical steps to take in getting balance transfer loans to your credit card are the following:
Apply for a credit card
You can apply for balance transfer when you apply for a credit card or you can wait before your credit card application to get approved for you to apply for a balance transfer. The best thing to do is apply for a credit card that has 0% introductory APR offers on balance transfers.
To get the best offers, it would be best if you have a good credit score. Also, keep in mind that you cannot transfer your credit to the same credit provider. For example, if your previous credit card is American Express, you cannot transfer your existing debt to another American Express card.
Provide necessary information
In initiating a balance transfer, you should be armed with the necessary information. You have to have information on the debt you are planning to move, the issuer name, account information, and the amount of debt.
After applying, wait for the approval of your balance transfer. Once approved, typically two weeks or longer, the new issuer will pay off the debt to the previous issuer directly. The old balance and the transfer fee will be credited to your new account.
Pay off the balance to the new issuer
Once the new issuer pays off your previous debts, then you have to compensate for the new balance. You are responsible for paying off the balance monthly. If you are lucky to get a new credit card that has 0% introductory APR, then you will save money.
Benefits of balance transfer
The very obvious benefit of a balance transfer is that you will save a lot of money. For instance, if you will transfer a high-interest rate to the credit card with a low-interest rate or 0% introductory APR, you will save money from the interest.
Juggling several debts and paying them separately in one month is inconvenient. But if you transfer all these debts into one credit card, then you will only be paying one debt every month. Having only one interest rate to worry about makes the debt more manageable.
More time to pay off debt
Since the interest rate is lower in balance transfer, then you will not only be saving money but also buy more time in paying off the balance. If the new credit card has 0% introductory APR, then there will be no problem if you pay off the debt at a slower pace, since interest will not accrue for a period.
A balance transfer is one effective way of managing several debts. However, if you can manage to pay off your debts in a short period, say 3 months, and you cannot qualify for a 0% introductory APR credit card, then you can pay off your debts without getting a balance transfer.
But in general, a balance transfer is an efficient and convenient way of paying off several debts while saving money at the same time. If you need a longer period to pay off your debts and you qualify for a 0% introductory APR credit card, then there is no harm in getting a balance transfer.
Tiffany Wagner is a freelance writer who writes for various financial-related websites and specializes in personal loans and credit cards. When she is not writing, she reads books at the local park while sipping on a cup of hot Americano.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes.