Credit Card Balance Transfers
Balance transfers are a means of transferring a balance from one credit card to another. When a new credit card is issued, balance transfer offers are often included as an enticement to use the new card. Credit card companies may offer 0% interest for an introductory period of time, they may offer a low introductory interest rate or bonus reward points for transferring balances to the new card.
When a balance transfer is completed the new company gains a customer and a balance that can be charged a higher rate of interest after the introductory period. Customers love balance transfers because it is a chance to move an existing balance to a low rate, even if it is temporary.
While the occasional permanent low rate may be offered on balance transfers, the days of lengthy promotional periods are mostly over. Today you will find low rates and zero percent offers anywhere from 6 months to 18 months. There are two strategies that make sense when considering the promotional rates. The first is to only transfer the amount that can be paid off in full during the promotional period. By making the current higher debt payment, based on the higher interest rate, it is possible to quickly pay down a debt that has been weighing you down. Second, if you choose to transfer a larger amount that will not be paid off by the end of the promotional period, consider the higher, non-promotional rate, and ensure the balance transfer still makes sense.
Fees can range from 3% to 5% of the balance transfer amount. Calculate this fee and determine is the amount of the fee combined with the lower interest rate, really saves you money. If the promotional period is short and the ongoing interest rate is no better than the balance on the existing credit card, it may not be worth transferring the funds.
For example if you pay a 5% fee on a 5,000 balance transfer the cost of moving the money from one credit card to another is $250. If the interest rate is lowered from 18% to 5% the annual savings could be $650. This means a 12 month offer at the lower rate will save money as long as the long term rate is no more than 18%.
Effect on Credit Score
Balance transfer offers are for those with good or excellent credit. When you apply for a new card, often there is an offer for balance transfers before you know if you are approved or what limit will be offered. Accepting an offer at the application level can result in hurting your credit score because it will impact the utilization percentages. Waiting until the card is approved, generally does not impact the balance transfer offer and you can better assess the best strategy for lowering the interest rates on any revolving debt you are carrying.
If you close the old credit card this could have a negative impact on the credit score. The age of credit and how long you have had open accounts impacts the credit score along with how much available credit is actually used. Both of these factors can be impacted by balance transfers.
If you transfer a balance from one credit card and then use the old card again to acquire new balances, the credit score will go down and the consumer can find themselves in a situation where overspending makes it difficult to pay the credit cards off.
Using balance transfers strategically can be a true benefit for consumers. You could purchase a large appliance on one card, acquiring points or rewards for the purchase. Then transfer the balance to the zero percent interest for 12 months and sometimes get rewards again on the new card. As long as the purchase is paid off during the promotional period then the consumer can come out significantly ahead.
Using the Card
When a balance transfer is put on a credit card it is best not to use the card for purchases, while the promotional rate is in effect. When a card has purchases for multiple rates the payment is applied to the lowest rates first. This means that the payments will be paying off the low interest promotion while new purchases are accruing interest each month at the higher rate. Anytime you use a card to obtain a zero percent or low interest financing, set the card aside until the promotional period ends or the balance is paid off.
The difference Between Promotion Purchases, Balance Transfers, and Cash Advances
Many companies offer credit cards for a particular store that will offer promotions when you spend at a certain threshold. These work very differently than balance transfers.
Promotional purchases allow you to complete a large purchase, often 299 or more, and receive interest free financing for a designated period of time. Anywhere from 3 months to 18 months is common. When these purchases are made, if the balance is not paid in full by the end of the promotion, the high interest rate is charged from the date of purchase. In this case the consumer loses the entire benefit of the promotion.
Balance transfers is moving an existing balance from one credit card or loan to another. The promotional interest rate will be charged for the established period of time. Once that time has expired then the higher rate will apply to any remaining balance on the account. New purchases are charged the higher purchase rate for the card.
Cash Advances are access to cash taken directly from the card. Credit card companies may send the consumer checks or a PIN number that can be used at an ATM. The card may also be set up as overdraft on a bank account. Any cash accessed through these channels will be recorded as a cash advance. The cash advance charges the highest rate and often comes with a flat fee up front in addition to the higher rates. Cash advances should be avoided if at all possible.