What is a Balance Transfer?
You may have seen offers for credit card balance transfers and wondered how exactly it works and if it can be of any benefit to you. A balance transfer is when you apply for a new credit card with a low interest rate, then move your existing balances from another credit card to the new card. Essentially, you are using the new card to pay off the old one, but at a much lower interest rate. This can be a great tool to help you pay down current high-interest debts, as long as you have taken the time to understand how balance transfers work.
When you complete a balance transfer, understand that this does not immediately pay off any of your debt. You are merely moving your existing debts with one lender to a new account with another financial institution. When choosing a card and financial institution for a balance transfer, you want to do your research beforehand. Transferring your balances to a new card only makes sense if it will save you money and help you reduce or eliminate your debt. Here are some things to consider before making the decision to transfer your balances:
Benefits
There are a number of benefits associated with transferring your balances to a new lender. These benefits can include dropping to a lower interest rate and lowering your monthly payment amount. Credit card companies often offer promotional lowered interest rates for a specified amount of time in order to encourage customers to transfer their debts. The primary goal of transferring your debts to a low-interest card is to help you pay off your existing debts faster while helping you save money.
An additional benefit presented by balance transfers is the opportunity to consolidate debt from multiple cards down to one. If you’re struggling to pay off debts across multiple credit cards, each one with different due dates and minimum payment amounts, consolidating those onto one single card simplifies the task of managing your debt. You will be able to pay off your debts much faster at one low interest rate. However, you’ll want to ensure that the total combined balance on your new card doesn’t exceed 30% of your available credit. A good rule of thumb is to keep your credit utilization ratio below 30%. Exceeding that limit can negatively impact your credit score, and the main goal when transferring balances is to get your credit back on track.
Fees
Aside from weighing the benefits, you also need to consider if there are any fees associated with performing a balance transfer. Some credit card companies may charge you a balance transfer fee, however there are options available that don’t charge a fee. You’ll also want to consider if the institution charges cardholders any annual fees; a card with no annual fee is the best option for balance transfers. Our Robins Financial Visa® Platinum Rewards Credit Card has no balance transfer fees or annual fees.
Rates
It’s important to understand your rate when transferring balances to a new card. Figure out when the current rate will expire if you sign up during a special offer, and make sure you know how much your rate will increase when the promotional period is over. If you still have a balance on the card when the introductory rate expires, it can be tempting to find another balance transfer offer so you can avoid paying interest for even longer. However, repeatedly moving your balances to new low-rate cards while still carrying a high balance can damage your credit even further. Don’t get comfortable moving your debt around from one card to another. Commit to paying it off entirely. A good goal to strive for is to have the full balance paid off by the time the end of the promotional period rolls around.
Limits
Some companies have limits on the maximum amount they allow you to transfer. You can still make the transfer even if your current balance is more than the limit, however you will still have a remaining balance on your old card. You will need to continue making payments on the old card in additional to making payments on the new card you transferred your balance to.
Start Fresh
Once you transfer your existing balances to a new low-interest card, create and stick to a plan that will get your debt down to zero during the introductory period. Even if you have to make some adjustments to your lifestyle and spending habits, stay committed to getting your debt paid down. After all, paying off your debt is the whole point of a balance transfer. You can apply the money you save in interest to your balance to get you out of debt faster.
Once you transfer your balance to a new card, you may wonder what to do with the old card. Generally speaking, it helps your credit score to keep your oldest lines of credit open. However, if you don’t trust yourself to stop spending on that card, or if you will be charged an annual fee with it still open, it’s best to go ahead and cancel it. If your account is closed in good standing, it will remain on your credit report for ten years, and can help improve your credit score.
Robins Financial Credit Union is committed to helping our members. Our Visa® Platinum Rewards Credit Card gives you premium purchasing power with no balance transfer fee or annual fee, and we offer convenient payment options to help make your life a little easier. Give us a call or stop by to discuss your options and see how we can help you save.