Balance Transfer | Definition

A balance transfer card is quite simple. Credit card companies want your business, so to entice you to start using their credit card, they often offer promotions. Think of it like a sale on credit. This particular promotion involves giving you a certain number of months to hold a balance on your credit card without charging you interest.

Naturally, this is helpful for people who want to pay off a balance, consolidate credit card debt, or avoid interest charges, all of which potentially save money. But that doesn’t mean this sweet deal is for everyone right now. So let’s look deeper at how balance transfer cards work.

How Does a Balance Transfer Card Work?

If you’re considering a balance transfer card, here is how balance transfers work.

1. Applying for a balance transfer card

Applying for a balance transfer card is just like applying for any credit card. Before you apply, make sure that you meet all of the qualifications and that it meets your balance transfer needs. We’ll cover that more later.

2. Requesting a balance transfer

Once you’ve been approved and received your card, you need to request a balance transfer. To request a balance transfer, you will either use digital bill pay, have your new card company reach out to your old card company, or use balance transfer checks. Just make sure that the way you go about requesting a balance transfer falls into the correct category to qualify for your new promotional interest rate.

3. Waiting for the transfer to go through

As with anything financial, a balance transfer does not go through immediately. It can take a few weeks for the transfer to finalize. So until you see the balance zeroed out on your old account, make sure you keep making your minimum payments. Also, don’t use that old credit card after initiating the balance transfer because you will still be on the hook for any new purchases on that card—they won’t automatically transfer.

4. Pay down the new balance

Now that the transfer has gone through, you can start paying down your balance. This is the most important step. If you just transfer your credit card balance from one card to another without paying down the balance, you’ve stuck your finger in the hole in your boat. You need to bail out the water too.

What to Look for in a Balance Transfer Card

So if you like the idea of a balance transfer, now it is time to look into cards. The first step when you look at any card offer is to read the terms of your offer. Every card is slightly different and it can be really tempting to just assume that the big 0% for 18 months advertisement applies to balance transfers. It may be 0% on new purchases only. Or it may be 18 months on new purchases and only 6 months on balance transfers. Reading the terms of the offer for each offer is extremely important.

So what terms should you be on the lookout for?

1. Introductory 0% interest rate

If you’re going to go through the effort of getting a balance transfer, you must get a 0% interest rate. This introductory rate is what makes a balance transfer worth it. Be sure that it is 0% on balance transfers and not just new purchases.

2. Length of APR (Annual Percentage Rate) Period

The longer the length of the promotional period, the better it is for you. So try to get a card that has a longer 0% interest rate period. Some promotions are as short as 6 months, and some are as long as 21 months. Just make sure you are getting the longest promotional period possible when you apply for a card because this allows you to avoid paying interest for a longer period of time.  

3. Balance Transfer Fee

Another thing to look out for is a balance transfer fee. Balance transfers without any fee used to be more common. Now you can generally get a balance transfer with a 3% fee (or a minimum of $5). If you can’t find a 0% fee on balance transfers, make sure you get the smallest fee possible.

4. $0 Annual Fee

Annual fees are generally unhelpful when you're trying to get out of debt. There are plenty of balance transfer cards out there that don’t have an annual fee, so just do yourself a favor and make sure there is no annual fee before applying.

Who Benefits From a Balance Transfer Card?

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If you’re still unsure whether you should do a balance transfer, here are some guidelines for you.

1. You have good credit

Most balance transfer cards require a relatively high credit score. If you are below 600, you should consider working on building your credit before you start applying for balance transfer cards. Always check the credit requirements before applying. This is especially important since the hard inquiries on your account will cause your credit score to decrease.

 Recommended Read: 3 Ways to Build and Improve Your Credit Score

2. You have a plan to pay off your balance quicker

Applying for balance transfer cards without a plan in place will make you worse off in the end. Have a certain amount that you can set aside every month to pay down your balance. Do your best to pay it off before the promotional period ends. And don’t get into more debt while you’re paying off a 0% interest card.

Recommended Read: How to Prevent Running Out of Money Each Month

3. You want to consolidate your credit card debt

If you have debt in a lot of places, consolidating it into 1 card with a lower interest rate can be a great strategy. You aren’t paying the minimum payment on multiple cards, and you don’t have to track when to make payments where. Debt consolidation does a lot to reduce stress. Once again, make sure that debt consolidation isn’t an excuse to get into more debt later.

The Money Wrap Up

Balance transfer cards are a powerful tool to pay off debt fast while minimizing interest. The only reason you shouldn’t get a balance transfer is if you aren’t ready yet. A balance transfer card can help just about everyone pay down debt. To get ready, you need to improve your credit score, make a plan to pay off your new promotional balance, and decide what loans you will wrap into your new credit card. Once you’ve done that, you should be ready to use a balance transfer card.

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