What is a balance transfer?
Hana LannisterIf you are carrying a balance on your credit card and want to decrease the amount of interest you pay and get rid of your debt quickly, then transferring your credit card balance could be a great option for you.
1. What is a balance transfer?
A balance transfer is the means by which your higher interest rate balance (usually from a credit card) is transferred to another credit card with a lower interest rate. By transferring your balance from a high rate credit card to a lower rate tool, you pay off debt faster because you pay less interest and pay more on your debt principal.
2. How does the balance transfer work?
To take advantage of the balance transfer strategy, you must transfer your high-interest credit card balance to a balance transfer credit card. A balance transfer credit card is a card that offers an extremely low promotional interest rate (usually between 0% and 3%) over a specified period, for example, six months.
When you transfer your high-interest rate balance to this Milestoneapply credit card, you take advantage of the promotional low-interest-rate during that time. This period is proving to be a golden opportunity to really reduce your debt amount, as more of your payments will go towards paying off principal rather than interest. A 0% balance transfer credit card gives you the opportunity to pay off your principal faster than a high-interest 19.99% credit card.
3. The role of balance transfer offers
It is important to know that the interest rate on a balance transfer is not a permanent rate. The low rate of interest is usually offered for a specified period.
currently one of the best credit cards with balance transfer in the United States according to our most recent ranking offers balance transfer at 2.99% for six months. This six-month period is called the promotional period. At the end of the promotion term, the 2.99% interest rate no longer applies.
After the promotional period, the balance will be subject to the normal credit card rate, in this case for the mentioned card, of 14.99%. The promotional nature of the interest rate makes it important to monitor your credit card balance when the higher rate applies and try to pay it off before the promotional period ends.
Details
- No annual fees
- The promotional annual interest rate of 2.99% on balance transfers for the first 6 full months
- Purchase interest rate of 14.99%
4. Balance transfer does not equal balance payment
By transferring the balance to a credit card with a balance transfer, you are not eliminating your debt. In effect, you are simply transferring your balance from a high-interest card to a credit card with a lower interest rate. This means that even if paying off your debt is made easier by a significantly lower interest rate, the debt still needs to be paid off.
In fact, take advantage of the low rate in effect during the promotional period to pay off your balance transfer before the interest rate rises.
5. New purchases charged to a credit card with a balance transfer will be subject to a higher rate.
While balance transfer credit cards are a great way to reduce the amount of interest you pay on past purchases, new purchases aren't. When you charge new purchases on your credit card with a balance transfer, they do not benefit from the promotional interest rate; they are subject to the standard credit card rate.
Thus, if you make a new purchase with the MBNA True Line Mastercard, it is subject to the standard interest rate of 14.99%, and not the promotional rate of 2.99%. This is the reason why it is good not to make new purchases with your credit card when you want to pay off your transfer balance.
6. Is the balance transfer worth it?
If you're having trouble paying off your credit card debt, a balance transfer can be a great way to temporarily lower the interest rate and pay off your debt faster. You can easily save hundreds of dollars in interest charges by taking advantage of a balance transfer.
A balance transfer is always beneficial if you believe you will be able to pay off your balance during the promotional period and if you are able to not charge new purchases to your credit card during this period. If the transfer amount is greater than your ability to repay it during the promotional period then a permanent low-interest credit card with no promotional period may be a better choice.
7. Things to watch out for when using a credit card with a balance transfer
A balance transfer is a great way to pay off debt faster, but it's important to read the fine print and be aware of the restrictions on these credit cards. Here are several things to consider:
- Promotional rates don't last forever: Promotional balance transfer rates are usually offered for periods of 6 to 12 months. After this period, the remaining balance is subject to the standard rate which may be higher than that of your current credit card.
- Additional Fees: Most credit cards with balance transfer charge a balance transfer fee equivalent to a percentage of the amount transferred. As these fees can sometimes reach as high as 3%, it is important to take this into account with the promotional interest rate when deciding whether or not the balance transfer is worthwhile.
- No Rewards: Most credit cards, even those that offer rewards on everyday purchases, do not offer rewards on balance transfers. Since your goal is to take advantage of a low-interest rate when transferring the balance, not receiving a reward is not a big factor.
- Credit Ratings: Some balance transfer credit cards require a very high credit score, which may prevent your application from being accepted.
If you have a balance on your credit card that you want to get rid of, then a balance transfer could be a great way to speed up that repayment and save you thousands of dollars in interest. Keep in mind that the low-interest rate on a balance transfer credit card is only available for the promotional term and some credit cards charge additional fees for the balance transfer.