If you are managing high-interest credit card debt, a balance transfer could help you pay it down faster and with less interest. People often use balance transfers to take advantage of 0% introductory rates on new cards, as well as other incentives that may be offered to entice borrowers to transfer their balances.
What is a Balance Transfer?
A balance transfer is moving debt from one or multiple credit cards to a new credit card, usually with a better interest rate or introductory offer.
Can I Use One Credit Card to Pay Off Another?
Not exactly. Typically, the lender won’t allow you to make a direct monthly payment on one credit card with another one unless it is a balance transfer card. This is because the lender charges a special fee for this service.
While there are typically financial incentives for the borrower to transfer a balance, the lender wants to make a margin on the transaction. This is especially true if they plan to offer you reduced interest rates or won’t be charging you interest upfront.
Who Needs A Balance Transfer?
Anyone who wants to pay less in interest, take advantage of a card incentive or simplify their debt repayment could benefit from a balance transfer credit card.
Perhaps you got a credit card a few years ago when you didn’t have a large credit history. Then you charged up the balance, and have been paying high interest on that debt. If you recently got a new job or experienced an increase in your credit score, you may want to improve your debt terms by transferring the balance from your old card to a new one.
Or maybe you have several store credit cards that you don’t use anymore but have balances that you need to pay down. It might make more sense for you to transfer the balances to a new card so you can simplify your repayment.
Whatever the reason, a balance transfer might be right for you if you are committed to paying down your debt and are eligible for an attractive balance transfer card offer.
What Does A Balance Transfer Cost?
Almost all balance transfer cards charge an upfront fee that is a percentage of the amount being transferred. This usually ranges from 1% to 3% for cards with low or 0% introductory interest rate offers. After the introductory period is over, the interest rate will go up and the lender will begin earning money in interest on the unpaid balance.
Additionally, all the fees associated with a regular credit card may apply to a balance transfer card. Look out for late fees, cash advance fees, international transaction fees and annual fees which should all be listed in detail in your application.
How Does A Balance Transfer Affect My Credit Score?
When you apply for a balance transfer credit card the lender will check your credit score and history. This results in a hard inquiry that can lower your credit score by a few points. According to FICO, credit checks typically lower scores by five points of less.
Fortunately, the effects are usually temporary. Still, it’s best to do your research and look at credit card terms in detail so you only apply for one card.
A balance transfer can affect your score if it increases your credit utilization. This is more likely to happen if the limit on the balance transfer card is lower than your old card. For example, if you transfer a $5,000 balance from an old card with a $7,000 limit to a new card with a $5,000 limit, credit models are going to view that as an increase in your overall credit utilization and could ding your score until you pay down the balance.
As you pay down your debt on a balance transfer card, it’s important to resist the urge to spend on that card. Doing so could result in more debt that could affect your credit.
3 Ways a Balance Transfer Can Impact Your Credit Score
- Hard Inquiry
- Credit Utilization
- Closing old account lowers average account age
What Happens To Old Credit Cards After a Balance Transfer?
Old credit cards that are left with a zero balance are considered inactive. If the card is inactive for a long time, the lender may close the account. Depending on where you are in your credit journey, a closed account could impact your credit score if it causes your available credit balance to drop significantly. Ideally, you don’t want to close old credit accounts permanently until you have paid down your debt so that your credit utilization is within the recommended limits.
For example: If you have transferred the balance of a maxed-out $5,000 card to a new card with a $7,000 limit, your new credit utilization will be $7,000 of $12,000 or 58%. While that is still high in terms of credit utilization, you can get your utilization down to 30% after paying $3,600 on the new card. If you immediately closed the old card, your credit utilization would jump up to 71% or $5,000 of the $7,000 limit.
Closing Your Old Account Could Lower Your Credit Score
When deciding what to do with your old accounts once you have moved the balance to your new card, consider the impact on your credit score. If you can resist the temptation to spend on the old card, keeping it open can increase your available credit balance which is favorable for your overall credit utilization. Also, closing the account could lower the overall age of your accounts which is considered in most credit scoring models.
Balance Transfers and Poor Credit
A balance transfer card for poor credit would allow you to reduce the cost of your existing debt by giving you a low introductory interest rate. Unfortunately, the idea is too good to be true. At this time, no major lenders offer balance transfer cards to people with bad credit. Issuers simply aren’t willing to take on the risk associated with lending to people they don’t deem creditworthy.
So, if you have a poor credit score, you may find it challenging to qualify for a balance transfer credit card. They are usually recommended for consumers with a score of 670 or above.
In order to become eligible for balance transfers or any other type of credit with a special offer or incentive, you’ll need to prove yourself to lenders and improve your credit score. Consider making a budget and adopting good habits that will help you improve your score.
Focusing on your finances for 6 months to a year could help improve your credit health and increase your eligibility for better offers.
Should I Get a Balance Transfer or a Debt Consolidation Loan?
It depends on how much and what type of debt you have. If you only have credit card debt a balance transfer might make the most sense. If you have many different types of debt a debt consolidation could be a more versatile option.
Is A Balance Transfer Better Cheaper Than a Debt Consolidation Loan?
Ultimately, you’ll need to do the math to see which one is the most cost-effective. Consider all of the upfront fees as well as what you estimate you’ll pay in interest over the life of the loan. Further, some debt consolidation loans have penalties for early repayment.
Let’s compare the overall cost of a balance transfer and debt consolidation loan for a $3,000 balance on which you make $300 monthly payments.
|You move $3,000 to a balance transfer credit card with a 6 month 0% introductory rate. You pay a 3% balance transfer fee of $90 that is added to your principal balance. In the first six months, you’ll pay down $1,800.00 interest-free. You then pay 10% interest on the remaining $1,290. It will take you four and a half months to pay off the balance in which you will pay approximately $29 in interest.|
|Total Cost: $119|
|Debt Consolidation Loan|
|You consolidate $3,000 in debt with a consolidation loan that has a 10% interest rate. You pay a 3% origination fee of $90 that is added to your principal balance. If you make $300 monthly payments it will take you approximately 11 months to pay down the loan and will cost you $150 in interest.|
|Total Cost: $240|
Even though this example demonstrates the upfront value of a 0% introductory period, a debt consolidation loan could be worth it if you know you’ll save more on the origination fee or the interest rate is better than the one often by the balance transfer card after the introductory period.
Crunching the numbers is the only way to be certain which is the better “deal”.
Alternatives to Credit Card Balance Transfers
A credit card balance transfer can be a great option if you qualify for a new card and a good introductory rate. If you have poor credit, are struggling to make payments, or simply want to pay down your debt faster and for less than you owe, debt relief could be right for you.
Debt relief is a debt repayment alternative that allows you to repay your debt in 12 to 48 months for less than you owe. People who work with Accredited Debt Relief can save up to 50% on their enrolled debts.
Contact a Certified Debt Specialist for a free quote.