If you’re staring at a few thousand dollars of debt and find yourself only making the minimum payments, a balance transfer could be a game changer for your finances. Using a credit card balance transfer can be a good way to dig yourself out of a hole in months, rather than years.
You may be a candidate for a balance transfer if you want to:
- Save money on interest payments
- Consolidate your debt from multiple credit cards
Honestly, you could save hundreds (and even thousands) of dollars by opening a card with 0% intro APR. But you should understand how balance transfers work before you commit.
Let’s take a look at balance transfers and the credit card offers that lead the league.
What’s Ahead:
What is a balance transfer?
A balance transfer is essentially a way to pay off one credit card with another.
To be clear, this is not debt forgiveness in any shape or form. You will still have the same amount of credit card debt as before — it’ll just be on a different credit card.
That may sound completely inane, but it’s actually a strategy that can save you a significant amount of money in the long term. I’ll show you exactly how in a second.
Read more: How to pay off credit card debt fast
How do balance transfers work?
It’s important to understand how balance transfers work because there are a handful of ways to do them.
When someone initiates a balance transfer, they have most often opened a new credit card and would like to relocate debt from an old card(s) to their new card. However, you don’t need to open a new credit card to use this perk. Many issuers allow you to request a balance transfer — sometimes even offering promotional terms that make the prospect very enticing.
Whatever your situation, the process is easy. There are a few ways to get the ball rolling:
- Submit a request online. You can usually ask your card issuer for a balance transfer through your online account. You’ll just need to give them the account information as well as the amount you’d like transferred.
- Call your card issuer. If you’d prefer to talk to a human, you can call your card issuer instead. Be ready with both the account number of both the balance you’re trying to transfer and the number of the card you’d like to transfer the balance to — as well as the amount of debt you’re transferring.
- Through the mail. Sometimes your credit card will snail mail you an offer to transfer a balance from another credit card in the form of a check. You can fill it out and send it back to effectively relocate debt from another card.
- Request a balance transfer during the application process. If you’re opening a new card to transfer your debt, you can sometimes request your transfer before you even hit “submit” on your card application.
Nearly all credit cards will charge you a fee of between 3% and 5% for the privilege of relocating your debt.
What is a 0% APR balance transfer?
Many credit cards offer a low (or even nonexistent) introductory interest rate as incentive to apply.
The kings of balance transfer cards are those that offer a 0% intro APR. This allows you to transfer a balance and immediately stop the exorbitant interest payments the banks are taking from you.
For example, let’s say you’re carrying a $4,000 balance on a card with a 20% APR — and you’re only making the minimum payment of $95 each month. At this pace, it will take you 73 months to pay off the balance. With interest, you’ll end up paying almost $3,000 in total.
Now let’s say you open a card with 0% intro APR for 21 months on balance transfers and an ongoing APR of 16%. You could pay off your debt in 44 months with the exact same payment amount, and you’d only be paying a little over $900 in total interest. That’s a savings of more than $2,000 in interest payments — just from opening a balance transfer card.
You can use our debt payoff calculator to see when your credit card balance would be paid off at its current APR and minimum payment. Again, remember to take into account the fee associated with your balance transfer.
Read more: Best 0% balance transfer credit cards
How much can you transfer?
You can transfer as much debt as your credit limit allows.
In other words, if the “destination” card where you want your debt to land has a $5,000 credit line, you can’t transfer more than $5,000. Balance transfers aren’t considered purchases, but they eat up your credit line in the exact same way.
There are some exceptions to this. In some rare cases, your “destination” card may not allow you to max out your full credit line with a balance transfer. Card issuers also may cap the total amount you can transfer if you’ve got an exceeding amount of debt.
Here’s a quick guide to how much you can balance transfer with the leading banks:
- American Express — 75% of your credit limit or $5,000 (whichever is less)
- Capital One — Full credit limit (minus balance transfer fee)
- Chase — 95% of your credit limit or $15,000 (whichever is less)
- Citi — Full credit limit (minus balance transfer fee)
- Discover — 95% of your credit limit (to leave room for balance transfer fee)
What kind of debt can you transfer?
The type of debt you can relocate to your new card depends on your credit card issuer.
Here are the forms of debt each major bank accepts for balance transfers. It’s worth mentioning that you cannot balance transfer any debt within the same bank. You must be transferring from a different bank.
- American Express — Credit cards
- Capital One — Credit cards; personal loans; auto loans; student loans; home equity loans
- Chase — Credit cards
- Citi — Credit cards; personal loans; auto loans; student loans; home equity loans
- Discover — Credit cards; personal loans; auto loans; student loans; home equity loans
Certain issuers may allow the transfer of debts like medical bills and payday loans, as well.
The bottom line
And now you know how to do a balance transfer!
If you use them wisely, they can be a great tool to get out of debt and save money on interest payments. The rules of what types of debt you can transfer to your card — and how much of debt you can transfer — varies based by credit card issuer.
The one constant, however, is that you won’t be able to transfer more debt than the credit line available to you. If you’re thinking of opening a credit card with low introductory APR, be sure your credit health is in a relatively good place, or you may find that your new card only offers a $1,000 credit line. That’s not much help if you’re trying to consolidate credit card balances or relieve yourself of draconian interest fees on a large chunk of debt.
Featured image: Watchara Ritjan/Shutterstock.com
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Source: moneyunder30.com