It is possible to save tens of thousands of dollars and many years of payments by temporarily eliminating interest from your debt. Having any form of debt that is accruing interest is always a good idea to look into possibilities that might save you money or help you pay it off sooner. Credit cards with the ability to transfer balances may be an effective tool for both of these goals.
To pay off current debt with other lenders, you should look for any credit card that provides a 0% or low-interest rate option. When you pay little or no interest for a period of time, you can use more of your monthly payment to pay down your debt rather than paying interest on it.
As part of this article, you’ll learn about balance transfers, how they operate, and what to look for when comparing balance transfer credit card possibilities.
Balance transfers can be done in several ways
Transferring debt to a credit card with a 0% APR or a reduced interest rate is known as a balance transfer. A new low-interest credit account is being opened to pay off your other debts. Using this strategy, you will be able to pay off your debt more quickly since you are reducing the amount of interest you pay on the money you borrowed.
You may transfer a variety of debts to a credit card through a variety of institutions. Personal loans, vehicle loans, mortgages, medical expenses, home equity loans, payday loans, title loans, and business loans are examples of this type of debt. When obtaining a new credit card account for the goal of transferring a balance, it’s vital to inquire about the usage of a balance transfer credit card.
As part of the application process for a new balance transfer card, you will be required to give personal information such as your name and contact information, your Social Security number, and your yearly income. Information regarding the accounts from which you want to transfer funds may also be required. The name of the creditor/payee, the amount owing, and the account numbers can all be included here.
In the event that your application for a credit card is approved, the bank providing the card will evaluate it and determine the amount of credit you will be granted. The bank will make a direct deposit into the accounts you selected if you supplied that information in your application. In most cases, you may begin a balance transfer via your online account or by phoning customer support once you’ve applied for the card.
It’s possible that the bank may send you a check or transfer funds to your checking account so that you can make direct payments to your creditors with your new line of credit.
Faster debt repayment with a balance transfer
Merely a little portion of your monthly payment goes toward paying down the balance if you have a high APR and only make your minimum payment each month. As a result, it will take longer and cost more to pay off the loan, as interest accrues each month.
You should opt for a credit card that offers a 0% introductory APR on balance transfers if you want to pay off your debt faster. In most cases, these first interest-free periods extend between 12 and 18 months. The bank will be able to pay one or more of your creditors on your behalf after you have been approved.
Now that the previous balance has been paid off, you have a balance on your new credit card, which is subject to your new 0% interest rate. In other words, because you’re not paying interest, every penny you put toward your loan gets applied to the principal.
If you’d want to get out of credit card debt faster, an introductory balance transfer offer might help:
What it costs to pay off $5,000 in debt with a regular credit card
With your credit card, you make a $5,000 buy with ease. The APR on this card is 17%. / (which is close to the average credit card interest rate). The first month’s minimum payment is $120.83 according to the conditions of your credit card agreement (your minimum payment is the interest accrued plus 1 percent of the balance, in this case). The $70.83 of the $120.83 minimum payment is used to cover the month’s interest, while the remaining $50 is put into the debt. You now have $4,950 in your account.
After 18 months of making a $120.83 monthly payment, you will have paid off your credit card debt to the tune of $1,016.95. This monthly payment would take you 63 months (or 5.25 years) to pay off the principal and you would pay $2,579.74 in interest costs.
What it costs to pay off $5,000 in debt with a balance transfer credit card
If the $5,000 debt is moved to a card with a 0% intro APR and you continue to pay the same $120.83 each month, you will have decreased the transferred balance by $2,174.94 during the 18-month promotional period alone. In addition, you’ll have saved $1,016.95 in interest payments over the course of that time period.
Only $2,825.06 will remain on your card by the time interest is charged. When transferring a debt from one credit card to another, the APR will be 17 percent, which is the same as that of the original card. As of today, you’ll only have to make a minimum payment of $68.27 every month. At this rate, it will take you 63 months or 5.25 years to pay off the remaining principal, for a total of $1,457.60 in interest. In 29 months or 2.4 years, you will pay off the debt and only pay $630.72 in interest if you continue to pay the $120.83 every month.
About Balance Transfer Fee
Transferring debt from one credit card to another typically results in a fee charged by the issuing bank. Between 3% and 5% of the transferred amount is normal, with many credit card issuers requesting that the charge be paid in advance. When we review our recommended cards, you will see this in the chart below.
You should factor in balance transfer fees when determining how much you can save by paying off your credit card debt in full with a balance transfer. To put it another way, the balance transfer charge will be removed from your new card’s available credit line, reducing the amount of space you have left for the actual transfer of your balance.
If your account has a $15,000 limit plus a 3% balance transfer charge, you won’t be able to pay off all of your $15,000 in debt. The cost would raise the transfer amount by $450 (15,000 x.03 = 450), putting you in violation of your credit limit. As a result, the maximum money you could move to your new account is $14,550 (15,000 – 450 = 14,550).
No-fee credit cards are available, but they generally don’t provide the 0% introductory interest rate that can help you pay off your debt the fastest. If you can locate a card that doesn’t charge a fee and doesn’t charge interest, it’s probably worth looking into.
How much can you transfer?
Your bank’s terms and restrictions determine how much money you can send via a balance transfer. You may only be able to utilize a portion of your credit line for balance transfers, or you may be able to transfer up to your credit limit (less any costs associated with the transfer).
With a credit limit of $2,500, for example, your new card authorized you for a balance transfer limit of $1,500. However, you may only use up to $1,500 of that amount for balance transfers. One benefit of this is that the cost for transferring balances is usually not deducted from the amount you can transfer. To sum up: You should be able to transfer the whole $1,500 and any additional fees that may be related to it.
In general, a higher credit score means you’ll have access to a bigger balance transfer limit and can transfer a larger portion of your available credit. Consider the limits of your balance transfer credit card before deciding how much money to move to it. If you can’t transfer the whole balance of high-interest debt to a zero percent APR credit card, you can still save money on interest if you can move as much of the balance as possible.
What types of debt can you transfer?
Using a balance transfer, you can only pay off a portion of your debt at a time. It’s rare that you’ll be able to use your cash advance to settle another debt you have with them. Some banks only allow you to pay off your other credit cards, and not your own. Others may provide you with balance transfer checks that you can use to settle debts owed to other companies. For those who like, they can even transfer the money straight to their bank accounts.
Make sure to find out what sorts of debts you can pay off using a balance transfer card when you’re doing your study so that you can prepare accordingly.
Does a balance transfer hurt your credit score?
You may see a tiny dip in your credit score at first because of a rigorous investigation. As soon as you apply for a bank account, your credit report will be requested by the bank for examination. In your report, you describe this as a “difficult inquiry.” Despite the fact that they might be on your record for up to two years, the influence is generally only felt for a few months at most.
A balance transfer card approval is beneficial for your score since it improves the amount of money you have available to you. Think of it this way: You’re not actually erasing your debt when you move it from one lender to another. A new account gives you access to extra credit, but your overall debt stays the same.
Your credit utilization ratio will slowly improve as long as you don’t make any new charges on the account you freed up with a balance transfer and you also pay on your new account. It is the percentage of your revolving credit that you utilize that has a significant influence on your credit score. When utilizing a balance transfer as a financial tool, make sure to pay down existing debt and avoid making further purchases with the accounts you’ve already paid off.