Balance Transfers: What You Need To Know
Balance Transfers: What You Need To Know
Monday, January 29th, 2024
Debt, Debt, Debt
As of mid-January 2024, Americans are in $1.079 trillion worth of credit card debt, according to LendingTree, a popular online lending marketplace.
In fact, according to data from the American Bankers Association, “Americans carried a balance in 56% of all active credit card accounts on average in the third quarter of 2022.”
Regardless of the reason, carrying a balance month over month can be financially and mentally stressful.
Not carrying a balance month over month helps you save and invest more, which is more beneficial than paying interest.
Because of this, it’s worthwhile to look for options that help you pay off your credit card more efficiently.
While there are many, balance transfers have become a go-to solution for many looking to eliminate high- interest credit card debt.
Balance Transfers: An Introduction
A balance transfer allows you to move an outstanding debt- either the entire balance or a portion - from one credit card to another.
While this may initially sound odd and ineffective, balance transfer credit cards typically have promotional offers that make it worthwhile.
The promotional offers generally have a low introductory rate and sometimes include additional spending-based promotions.
Spending-based promotions usually give you a monetary bonus for spending a certain amount within a given time. For example, you may be able to get $200 for spending $500 in the first three months.
The low introductory rate is generally 0% throughout the promotional period, and the longer the promotional period, the better.
Promotional periods can last 6 to 21 months, or even longer, depending on the credit card issuer.
Note that you typically can’t transfer an existing balance within the same card issuer, meaning the credit card issuers must be different.
Ideally, you’ll want to ensure that the transferred balance is paid off once the promotional period ends, so you should create a plan to accomplish this.
Having covered what a balance transfer is, let’s begin going over the benefits of balance transfers.
Benefits:
1. Introductory Rate Offer
Typically, the 0% introductory rate is applied to the transferred balance for the entire promotional period, which helps you pay the debt off efficiently.
Many credit card issuers even apply the 0% introductory offer to purchases made within the promotional period, which can be beneficial if you anticipate a large purchase.
Knowing when the promotional period ends will be vital since your interest rate will change to the prevailing interest rate based on your credit score.
2. Additional Credit Account
Since this requires applying for another credit card, completing a balance transfer will add a new credit account to your credit report.
According to Experian, a credit reporting agency, credit mix, which considers the different credit accounts you’re managing, accounts for 10% of your FICO credit score.
Getting a new credit account will help you establish a new banking relationship or deepen one, both of which are great.
3. Peace of Mind
Having debt can shift your focus away from matters that are more important to you, whether that be focusing on your career or time with your family.
Most of all, having high debt can make it difficult to sleep at night and make your days stressful.
Truly, one can’t put a price on peace of mind, and getting rid of high debt certainly can accomplish this.
Drawbacks and Potential Pitfalls
1. Fees
Balance transfers don’t come without their fees. In rare cases, credit card issuers will waive the fees associated with balance transfers; however, it’s unlikely.
You can expect to pay between 3% and 5% of the total amount transferred, and you can transfer balances from multiple cards.
Despite paying this fee, you’ll almost always save on interest paid at the end, which is the primary goal.
2. Hard Inquiry
Since you’ll have to apply for a new credit card, this will inevitably result in a hard inquiry, which can temporarily lower your credit score.
According to Equifax, a credit reporting agency, hard inquiries stay on your credit report for two years; however, it only affects your credit score for one year.
With that said, be cautious with the number of hard inquiries since too many can negatively impact your credit score.
3. Lack of Discipline = More Debt
Balance transfers require discipline. A huge misstep one can do is to get into more debt after completing a balance transfer.
Having cleared one credit card of a balance, or even a portion of it, can tempt you to spend more, and you shouldn’t.
Getting into more debt will only worsen your financial situation and make it even more challenging to pay off your debt.
Should You Transfer a Balance?
There will be many instances where a balance transfer could benefit you. If you can pay off all or a chunk of your debt within a year and a half, consider a balance transfer.
Also, consider a balance transfer if you have multiple cards with high minimum payments. Consolidating that debt into one card can help lower the payment and decrease the payoff time.
There will also be times when you shouldn’t consider a balance transfer. If you know that getting another credit card will only cause you to spend more, then you shouldn’t.
If your debt has caused your credit score to decrease significantly, then you shouldn’t look to transfer a balance either.
This is due to the low chance of you getting approved and just further hurting your credit score. Instead, pay down your debt and apply later.
Additional Helpful Information
There is plenty of helpful information you should know. First, you need to know how to transfer a balance.
It’s important to know that you initiate the process through the credit card issuer that will end up with the debt.
You can call customer service, use the online portal (assuming the credit card issuer has an updated platform), or use the checks most credit card issuers provide for balance transfers.
Also, you don’t need stellar credit, but you do need decent credit, in most cases, to consider a balance transfer.
You must be able to get approved for another credit card, and some credit card issuers may see your existing debt and not approve you.
Lastly, balance transfer offers usually have a deadline for transferring the balance. Transfer the balance after, and you won’t be eligible for the promotional offer.
Alternatives to Balance Transfers
A balance transfer offer isn’t the only option available if you want to pay off high-interest debt quickly.
To pay off credit card debt, you can take out a personal loan, complete a cash-out refinance, or use a home equity line of credit (HELOC).
All of these options, like balance transfers, have benefits and factors to consider, so be sure to consider everything.
Final Thoughts
Balance transfers have enabled many to pay off high-interest debt quicker, and, more importantly, it has helped many eliminate debt altogether.
At the end of the day, a balance transfer is a financial tool that, when used correctly, can be extremely beneficial.
Be very disciplined with your spending if you decide that a balance transfer is right for you since it’ll be key to the overall process.
Plus, what’s great is that balance transfer offers are everywhere nowadays, so there’ll surely be no shortage of options.
Have you transferred a balance before? Why or why not? If so, how was your experience, and would you recommend it?
Let us know your thoughts in the comment section below as we always look forward to reading what you have to say!
Thank you for reading, and remember to Stay Financially Invested!
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