When it comes to paying off credit cards, feeling stuck or trapped is often the result of high interest charges. A useful way to reduce interest rates on your cards is to perform a balance transfer. This is where you transfer the outstanding balance of one credit card or loan to a different card in order to temporarily lower the interest rate to 0%. Here is the important info about what balance transfers are, their effect on credit, and how to complete one.
What is a Balance Transfer?
It’s no secret that credit card companies are competing for your business. One way they entice you to open a card with them is by offering you a way to transfer your existing debt to their company in exchange for a low introductory interest rate. You are not terminating debt or canceling cards. You are just shifting the debt from one creditor to another to save on long-term interest charges. These balance transfer offers can be a useful tool to help getting out of debt but only if used properly.
Here’s the catch: the low interest rate only lasts for a limited time. Usually, you’ll be able to pay as little as 0% interest for between 12 and 18 months (sometimes a little longer). The critical necessity for successfully using balance transfers is to be able to completely pay off your debt before the low interest period ends. Once the special rate expires, the interest charges will skyrocket to as high as 23%.
The bottom line: You must be able to pay more than the minimum payment each month.
How Will Your Credit Score be Affected?
Opening a new account will always have a potentially negative effect on your credit score. A new card will lower the average age of your credit accounts, which makes up approximately 15% of your credit score. Plus, the application will require a hard inquiry that will appear on your credit report and temporarily lower your score. There is a way around this for some. If you already have a card without a balance, some companies offer balance transfers with a 0% interest period on existing cards for a one-time 3-5% fee.
There is an advantage to opening a new card, however. Your credit utilization ratio will decrease when you open up a new account. If your total available credit increases and you are still utilizing the same amount, then your lower usage ratio can have a positive impact on your score. Plus, being able to more efficiently reduce credit card debt will improve your score eventually.
How to Perform a Balance Transfer
If you’ve evaluated your budget and determined that you could make large enough payments to clear a balance within approximately 18 months, then it may be time to look into available balance transfer cards. Check out NerdWallet’s Top Balance Transfer Cards of 2016 blog post. This provides a thorough list of current card offers with their benefits and drawbacks. Look at all fees and 0% rate periods to find the best card for you. Alternatively, check with your current account providers to see if you could transfer a balance to an existing card.
Here are three options for executing a balance transfer:
- Call the credit card provider directly. You can quickly provide your account and credit info over the phone to apply for a new card. Once approved, the balance will automatically appear on the new card. The old card will have a balance of zero.
- Apply online. It is easier than ever to fill out an online application for most balance transfer offers. When the new card is opened the balance will automatically transfer.
- Use a balance transfer check. This is only possible if you’re trying to use an existing account. Creditors will include balance transfer checks with the paper statement they mail to you each month. Fill out the check and mail it to the company you’d like to transfer the balance from.
Keep in mind, transfer offers are not a quick fix for how to get out of debt fast. You are still responsible for paying back everything that you owe. You should not make a habit of using balance transfers as a way to avoid paying debt.