Consumer debt in the U.S. currently stands at over $4.1 trillion. Of that prodigious figure, credit card debt comprises about a fifth. Americans had a collective credit card debt of at least $830 billion by the middle of 2019, according to Experian. Anyone whose household is included in that figure might consider taking advantage of a balance transfer credit card to pay off the debt at a faster rate.
What is a balance transfer? A balance transfer occurs when you move the balance of one or more cards onto a different card that has a lower annual percentage rate. The money you save on interest can be used toward your principal balance.
For example, QuicksilverOne from Capital One has a variable APR of 26.99%. It would be better to take the balance of this high-interest card and move it to one like the Chase balance transfer card, which has a 0% introductory APR for 15 months and then a 16.49% to 25.24% APR thereafter.
- Is It a Good Idea To Do a Balance Transfer?
- Do Balance Transfers Affect Your Credit Score?
- How Does a Balance Transfer Work?
- Attack Your Credit Card Debt
Given how debt presents numerous obstacles for Americans, most signs would point to yes, it is a good idea to do a balance transfer. But it doesn’t come without its own considerations or risks. A balance transfer consolidates debt while giving you some breathing room on the amount of interest you’d be paying on the principal. The organizational benefit, if nothing else, might be reason enough to execute a balance transfer if you’re working with multiple sources of debt.
That said, a balance transfer could set you back if you’re not careful. Credit cards rarely offer an indefinite 0% percent APR. Most credit cards switch to a variable APR rate after a year or so, and in some cases, the APR could be higher than what you’re used to paying on one card. There are also balance transfer fees to consider, but these are usually small and dependent upon the amount you’re transferring.
Balance transfers affect your credit score in a roundabout way. The actual act of transferring debt does not affect your score, meaning it’s not a factor in determining whether you lose or gain points. But the other factors involved in a balance transfer, such as opening up a new credit card account to facilitate the transfer, very much affect your credit score.
Because a balance transfer only consolidates debt, your amount of outstanding credit will not change but your ability to pay it off faster will. In theory, balance transfers help your debt by letting you pay it off at a lesser interest rate, which has a positive effect on your score — generally, the less available debt you use, the better your score is. Furthermore, your credit score is also determined by the number of accounts open — your balance-to-limit ratio, or utilization rate. By keeping your old account and opening a new one with the same amount of debt, you’re improving your utilization.
Balance transfers are relatively straightforward but require both planning and patience on your part. Here’s how to do a credit card balance transfer:
1. Assess Your Financial Situation
The first thing you’ll want to do is decide whether a balance transfer is beneficial to your specific situation. A balance transfer card works by getting you out from under credit cards that have high-interest rates and moving your debt to cards with lower rates or 0% introductory APRs for a specified time period.
Individuals who would benefit from balance transfer cards include anyone who is:
- Paying a high-interest rate
- Interested in debt consolidation
- Looking into getting a secured credit card
- Interested in paying off debt more quickly
- Seeking a higher credit score in the long term
Balance Transfers and Other Options: Best Ways To Consolidate Credit Card Debt
2. Choose a Balance Transfer Card
Once you’ve determined that rolling your credit card balance onto a new balance transfer card is best, you’ll need to select a card. To choose the right card, ask the following questions before committing to transferring your credit card balance:
- What is the introductory offer and how long is it in effect? You want a low to 0% APR with as long a term as possible. It’s easy to find cards that will give you over a year with little to no interest.
- What is the APR after the introductory offer has expired? You don’t want your new card to put you back in the same situation you were in before you got the card. Make sure the APR after the introductory period has ended is lower than what you were originally paying.
- Are there any balance transfer fees? You’ll need to look at the fine print to see whether the balance transfer offer charges any balance transfer fees. Some cards don’t charge a fee, whereas others offer the first balance transfer at no cost but charge on every transfer thereafter. Some cards charge a balance transfer fee upfront. Wells Fargo’s Platinum Card, for example, carries a transfer fee of $5 or 3% of the amount transferred, whichever is greater. After 120 days of opening the account, that rate bumps up to 5%.
- What is the credit limit? Know what the balance transfer card’s credit limit is so you know whether it is enough to cover the balance you owe on your high-interest card. For example, say the transfer credit limit is $10,000, but you owe $12,000. That leaves $2,000 that won’t be transferable.
3. Apply For the Credit Card Balance Transfer
Select the balance transfer offer you’d like to accept and fill out the requested information. To have the lender determine your creditworthiness, you’ll typically need to provide your:
- Social Security number
- Date of birth
- Income information
Next, you’ll need to let the company know:
- Which credit card you want to pay off
- Your account number
- The total amount you’d like to transfer
From here on out, it’s a matter of getting approved for your credit card. To that end, issuers look at your credit score. A credit score of 670 or higher is usually needed, according to Experian, but there are exceptions. Individuals with lower scores can also look into secured credit cards, which are geared specifically toward people with poor credit. Secured cards, which require a refundable deposit, carry higher APRs than regular credit cards. Alternatively, you can see if the card issuer will accept a co-signer.
4. Wait For Balance Transfer Approval
How long does a balance transfer take to be moved from one credit card to another? From the time of your application, it can take up to two weeks for the approval and balance transfer to be complete. During this time, protect your credit score and avoid late fees by continuing to make on-time minimum payments on the credit cards from which you’re transferring balances.
Look at your budget and create a payment plan that will allow you to attack your debt at a more aggressive pace. You might even want to set a goal of paying off the balance before your introductory rate comes to an end. It’s also a good time to review spending habits so you don’t continue to use the credit card for items you might not need.
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Sean Dennison contributed to the reporting for this article.