What is a Balance Transfer?

Everyone has some kind of debt. True financial health comes from how you handle and pay off that debt. If you find yourself needing to hit “reset”, you should look into a balance transfer. A balance transfer allows you to consolidate your debt from a credit card or loan to a new card. Seems redundant, right? Wrong! The goal is to transfer your current balance to a new credit card that has a lower interest rate and merge several outstanding balances into one. This helps save you money in the long run and simplifies your payments.

How does it work?

Let’s say you have an outstanding balance of $2,500 with 16% APR on one of your credit cards and another balance of $2,500 with 12% APR on another credit card. With the right promo, you could get approved for a credit card with a 0% introductory APR on balance transfers for 12 months. That’s a whole year without interest! To transfer the balances, you would contact your new credit card issuer to let them know the account details. Within a few weeks, the old balance will be added to your new credit card.

So yes, you still have to pay off your debt, but without the interest for the next 12 months! In this example, instead of paying for two different credit card accounts, you’ll just have to manage one, allowing you to pay off your balance sooner and easier.

Cons of a balance transfer

  • Fees – While 0% interest is great for 12 months, watch out for balance transfer fees credit cards can charge. Depending on the rate and your balance, this may eat into any savings you would get by switching, even if the new credit card has a lower interest rate.
  • Good credit score – To qualify for the best possible rates, you need to have a good credit score. It’s not impossible to still complete a balance transfer if your credit has seen better days, just be aware that you might not get the best deals.
  • Credit card limits – One of the perks of a balance transfer is consolidating your debt. Well, that can only happen if the new credit card you applied for gives you a high enough limit to cover all of your existing balance.
  • Temporary rates – You’ve transferred your balance to a card with an introductory 0% APR for the next 12 months. Great! But keep in mind, after that 12 months expires, that rate will go up. The only way to avoid this is to pay your balance in full during the promotional deal.

Tips for success

  1. Read the terms carefully. Take into account if there are fees, if there’s an introductory interest rate and how long it lasts, how much you can transfer, etc. The worst thing you can do is move your balance and get yourself into deeper debt.
  2. It may take a few weeks before the balance is transferred. Until that happens, make sure you stay up to date on your payments with your existing credit cards and loans. Missing a payment will only hurt your credit score and make you fall behind.
  3. Take note of important dates, like when your payments are due and when is the last day of your 0% promo rate. Remember, during the introductory promo, the goal is to pay most, if not all, of your balance.
  4. If you have less than 3 months left on your balance, it isn’t worth the time to transfer your balance. Just keep going strong and pay it off!

Everyone deserves a fresh start. Contact your local credit union today if you think a balance transfer is right for you.