Credit Card Balance Transfer: Basics, Limits, Charges & more
A credit card balance transfer can turn out to be a money saver if you move your current debt from a high-interest credit card to another one with a lower interest rate.
However, remember that, transferring a credit card balance to another does not eliminate debt. But moving the balance to a lower interest credit card can help you save money on interest and pay off debt faster.
Here’s how a balance transfer works
Transferring balances from several credit cards to a single, lower-interest card, helps in simplifying your payments. But, be careful! Surcharges, interest rates and other details, such as how much you can transfer and how long a balance transfer takes, can vary.
A balance transfer is not a way to get rid of debt. Balance transfers are usually accompanied by fees and you will most likely have to pay interest on the balance you transfer.
Some credit card issuers offer a 0% introductory annual percentage rate (or APR) for balance transfers for a specified period of time in order to encourage balance transfers.
But transfer comes with a catch:
If you transfer a balance, and that balance is still unpaid at the end of the 0% introductory rate period, you’ll have to start paying interest on the remaining balance. To avoid that, make a plan to pay off your credit card balance during the introductory zero interest period.
What is the transfer limit?
A balance transfer and any fees charged for the transaction are part of what counts toward your credit card limit. And many card issuers only allow you to transfer a balance up to a certain percentage of that limit.
For example, let’s say the credit card you’re transferring your balance to has a 0% APR on balance transfers and a $1,000 credit limit. If that card only allows you to transfer a balance of no more than 70% of the credit limit, including a 5% transfer fee, how much can you transfer?
At first glance, you might think you could transfer $700, or 70% of $1,000. But when you add the balance transfer fee, which would add up to $35, this figure exceeds the transfer limit. So you would have to subtract that fee from the limit figure first, which in this example would leave you transferring $665.
What if you don’t receive a high enough credit limit to transfer all of my credit card debt?
You may be approved for a balance transfer credit card only to find that the credit limit is below what you expected. In that case, it is recommended to transfer as much as you can. But make plans to pay off the remaining debt on your high-interest card in addition to the transferred balance.
After you regularly pay off what you owe on your new card on time, you may be able to ask for a limit increase. Otherwise, if you don’t think you’ll be approved for a card with a high enough credit limit, you may want to consider taking out a personal loan.
How to save on fees and interest on balance transfer?
You may want to do a balance transfer to save money, not to spend more. Here are some tips to help you save on fees and interest when you make a balance transfer.
Choose a card with no balance transfer fee
Consider getting a balance transfer card that has a $0 introductory surcharge for a period of time or no surcharge at all. Pay attention to when you will need to order balance transfers to take advantage of the $0 introductory balance transfer fee offer. This usually occurs during the first few months.
Don’t forget varying APR rates
Look for cards that offer a 0% introductory interest rate introductory period for balance transfers. Those introductory offers usually range from 12 to 21 months. But keep in mind that you’ll receive a different APR on balance transfers after the introductory offer period ends.
For example, let’s say your card offers a 0% introductory APR on balance transfers for 18 months from the time you open the account. But after 18 months, your APR on balance transfers changes to a variable APR of 16% on balance transfers. You’ll want to make sure you finish paying off the balance transfer before the introductory period ends. Or else that 16% APR will begin to take effect on the remaining balance. This could negate any balance transfer savings you might receive, if you do not make your payments within the introductory period.
Beware of Penalty APR
There is another type of APR you should be aware of: penalty APRs. If you miss payments, your card issuer may charge you a penalty APR. And note that as part of the penalty for missing payments or paying late during the introductory APR period, the issuer may also cancel its 0% introductory APR offer.
Take a look at the card’s terms and conditions before you apply for the card and transfer your balance so that you are fully aware of the different APR rates that may apply to your balance and when they will take effect.
Be careful when making new purchases
A credit card may offer a 0% introductory APR to help you pay for a balance transfer, but if the 0% introductory APR does not apply to purchases, new purchases you make with the card will have a different interest rate. Consider comparing possible rewards you can earn on the card versus how much interest you’ll pay on those purchases.
Set up payment alerts
Even if your card offers a 0% introductory APR for balance transfers and purchases, you should still make at least the minimum monthly payment on time. You can set up alerts to help you remember when your payments are due.
But, keep in mind that to finish paying off the transferred balance before the introductory zero interest period is over, you may need to pay beyond the minimum every month.
Continue making your payments while you wait
Requesting a balance transfer can be a quick process, but in some cases it may take several weeks to complete.
The amount of time may depend on the credit card issuer. Therefore, it is important to make at least the minimum payments on your prepaid card in time for the transfer to appear on that account.
Can applying for a balance transfer affect my credit?
Applying for a balance transfer card can result in a hard credit check on your credit reports. This may cause your credit scores to drop a few points. But, it can also increase the amount of credit available and decrease your credit utilization, which can have a positive impact on your credit scores.
A balance transfer can be a good option to consolidate your credit card debt and pay it off faster, but pay special attention to the terms.
APR rates, fees, the amount you can transfer and other terms may differ from card to card. Before applying for a new card, review the terms and conditions for surcharges, APR rates and any other transfer restrictions. Look for a card where the balance transfer works for you.
I am Nikesh Mehta, owner and writer of this site.
I’m an analytics and digital marketing professional and also love writing on finance and technology industry during my spare time. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business. I can be reached at [email protected] or LinkedIn profile.