All you need to know about the balance transfer method
The balance transfer method is one of the popular and effective ways to get rid of credit card debt! It can help you to make your multiple credit card payments through single monthly payments and most likely, with lower interest rates too!
But what exactly is the balance transfer method?
Well, in a balance transfer method, you can transfer all your outstanding balance amounts of your existing credit cards to a new credit card. But you have to make sure that the new credit card has a much lower interest rate than your existing ones! Thereby, you can bundle your multiple credit card payments into a single payment every month. And you can save money on your interest payments as well!
Many credit card companies and credit unions offer balance transfer cards with a 0% interest rate for an introductory period. Usually, the introductory period ranges from about 18 to 24 months. After that period, the credit card companies and credit unions usually levy an interest rate ranging from about 17.99% to 24.99%.
How do credit card balance transfers work?
Well, the worst part of credit cards is the incessantly high APRs! And in case you have multiple credit card debt, it can be more difficult to get rid of them!
In this situation, the balance transfer method allows you to transfer your outstanding payable amounts of the existing credit cards to your new credit card.
Usually, you will need a credit score of around 670 or higher to be eligible for taking out a balance transfer card. If you don’t have a good credit score, you can consider these amazing credit monitoring apps to boost your credit and get approved for taking out a balance transfer card at preferential rates.
Otherwise, you might get approved for a balance transfer card but the interest rate can be higher!
But I would advise you to opt for a balance transfer card with a 0% interest rate at least for an introductory period.
For example, the Citi Diamond Preferred Card offers an introductory period of 18 months. After that, they will levy a variable interest rate of about 14.74% to 24.74%! However, some balance transfer cards like PenFed Gold Visa Card offer an introductory period of 12 months. They will levy a fixed interest rate of about 17.99% after the introductory period ends!
Remember, you may have to shell out a balance transfer fee which is around 3% to 4% of the balance transferred!
So, make sure to go through the terms and conditions of the balance transfer card carefully! And I would suggest trying to pay off your balance transfer card within that introductory period. Thereby, you can save a substantial amount of money on your interest payments!
Also, you can transfer your balance amounts to an existing credit card if it has required credit limit and comparatively lower interest rate.
What are the advantages of opting for the balance transfer method?
There are 3 benefits that you can reap by opting for a balance transfer card, like:
1. Zero or lower APRs
The worst part of credit card debt is the incessantly high APRs. So, it might take a longer time to pay off your credit card debt.
But when you opt for the balance transfer method, you either choose a card with 0% APR (even if for an introductory period) or a card with a much lower APR than your existing ones. This way, you will save a lot on your interest payments. And it can help you to get rid of credit card debt faster too.
2. Consolidation of multiple credit card debts
If you have multiple credit card debts and multiple monthly payment dates, then using the balance transfer card can be the best bet for you.
By using such a card, you can consolidate multiple credit card debts, and make a single payment every month unlike before.
3. A lower credit utilization ratio
Well, opting for a balance transfer card can reduce your credit utilization ratio (the ratio of used credit to the available credit). And eventually, it will help to improve your credit score too.
When you take the new card, the credit limit of it is likely going to be much higher. And after transferring all your outstanding balance amounts to the new credit card, the credit utilization ratio is likely going to be much lower. Thereby, it will help you improve your credit score.
So, as you can see, the balance transfer method has an ample number of benefits. But like any other thing, it has some disadvantages too!
What are the disadvantages of using a balance transfer card?
Let’s have a look at the cons of using the balance transfer card.
1. It may hurt your credit score
When you shop around for balance transfer cards, the creditors conduct hard inquiries on your credit report. So, it can affect your credit score adversely for a short period.
However, if you are shopping around for competitive rates, multiple hard inquiries are usually treated as a single inquiry for a period of around 14 to 45 days.
2. The APR after the introductory period may be much higher
If you take out a new balance transfer card, the zero or lower interest rate (depending on your credit score) is usually applicable for an introductory period ranging from about 12 to 18 months.
After the introductory period ends, the credit companies will levy a variable APR of around 13.99% to 23.99%, depending on your creditworthiness. So, while taking out a balance transfer card, make sure to know about the APR that you will have to pay after the introductory period gets over.
3. Risk of racking up more debt
The 0% or lower interest rate of the balance transfer card may lure you to shop with your new card. But if you do so, you will be accumulating more debt and the interest rate levied on your purchases may be much higher. Eventually, it can become cumbersome for you to repay the outstanding balance amount.
Remember, you are taking out a balance transfer card for paying off your existing credit card debts, not for racking up more debt in your life. So, make sure to use your balance transfer card very carefully.
Do balance transfers hurt your credit?
Well, opting for the balance transfer can IMPROVE your credit score! Yes, you heard it right! Let me tell you why.
Most of the balance transfer cards offer an introductory period where they levy a 0% interest rate! That means, during the introductory period, you will pay off your principal amount! Eventually, your outstanding debt amount is likely gonna reduce and that’s good for your credit score!
Besides, the balance transfer cards usually have higher credit limits (depending on your creditworthiness). So, the transferred outstanding balance amounts will be a small percentage of the credit limit of the new card! Eventually, your credit utilization ratio will improve, and thereby, it will improve your credit score too!
However, while applying for a balance transfer card, the creditor will make a hard inquiry on your credit report. And that can result in a slight drop in your credit score. Besides, if you transfer a huge balance to the new card or the credit limit of the new card is low, the credit utilization ratio will reduce. And your credit score will reduce by a few points!
That’s why make sure that the credit utilization ratio of the balance transfer card should remain below 30%. And always make timely payments for the new card!
After transferring your balances to the new card, you might plan to close your old credit cards. But it can be a bad step as the length of your credit history affects your credit score to some extent! So, closing your credit accounts can lead to a drop in your credit score.
However, if you don’t need to pay any annual charges, you can keep your old credit accounts open but with zero outstanding balances.
So, if you keep the above things in mind, hopefully, you will notice an improvement in your credit score by opting for the balance transfer method!
What happens to your old credit card after a balance transfer?
While receiving the approval from your creditor about the balance transfer card, you will get to know about the credit limit as well! Your creditor will pay off your existing credit cards directly or issue you a check to pay them off. And the outstanding balance amounts of the respective credit cards will be added to your new card!
Make sure that your old credit cards don’t have any outstanding balances! Because, at times, a residual interest is levied on your credit cards and it’s accrued between the time when the bill was sent and the transfer was done.
What happens if I do balance transfer too much?
If you are planning to transfer your credit card balances multiple times, then I would say that it’s a bad idea! Because you aren’t doing anything to get rid of your credit card debts. Rather, you are just moving your debt from one balance transfer card to another. Besides, taking out new balance transfer cards can hurt your credit score as well.
So, in this case, I would suggest you settle credit card debt and get rid of it at the earliest!
Can I reverse a balance transfer?
Unfortunately, the answer is NO! You can’t reverse or cancel the balance transfer once the transaction is complete. If you decide to reverse the balance transfer as soon as after opting for it, you can talk to your creditors about it.
What happens if you don’t pay off a balance transfer?
If you fail to make timely payments on your new card, your creditor can cancel the introductory period offer of a 0% interest rate. Moreover, they can levy a penalty APR apart from the late fees.
It means, falling behind payments for your balance transfer card can increase your debt burden . So, always try to make monthly payments for your balance transfer card on time!
So, the bottom line is, the balance transfer method is one of the effective ways to consolidate debts with ease. But at the same time, you need to consider the transfer fees and the introductory period that the creditors are offering.
Besides, try to chalk out a repayment plan to pay off your balance transfer card within the introductory period. Thereby, as we discussed earlier, you won’t have to shell out money on interest payments. It will help you to make the most of the balance transfer method.