Guide to Credit Card Balance Transfers
What is Credit Card Balance?
Credit card balance is the total amount of money you owe on your credit card account at any point in time during the statement cycle. Your balance changes based on your account activity, it increases with purchases and decreases when you make a payment.
Purchases aren’t the only factor that can add to your balance. A credit card balance can also include other charges incurred during the billing cycle, such as …
Interest charges – These could be for any cash advances and on outstanding balances from the previous month
Balance transfers – Where the original transferred balance is not paid out during the 0% interest offer period, credit card providers may charge interest on the entire transfer amount rather than balance at time of offer expiry
Fees (such as annual fees or late fees)
If you can’t pay your bill in full and on time each month, the rest of the balance carries over to the next billing cycle. You build up interest charges on the portion of your balance that isn’t paid on time. Interest on cash advances is applied from the moment of the transaction, not interest free period is applicable and for this reason alone, cash advances using credit card should never be an option.
Doing a balance transfer can save you money by allowing you to move existing higher-interest credit card debt to a credit card with a lower interest rate.
Here’s how a balance transfer works, keeping in mind, balance transfers may have fee’s and the provider may restrict the amount transferable to a percentage of the total limit.
If you own one or two credit cards with high balances or even multiply cards with smaller balances that add up to a substantial amount, moving the balance to a lower-interest credit card will help you save on interest and even pay off the debt more quickly.
Note:
Some credit card providers offer 0% introductory rate on balance transfers for a specified period of time to encourage balance transfers. The catch? If you transfer a balance and are still carrying a balance when the introductory 0% rate period ends, you will have to start paying interest on the balance.
If you want to avoid this, draw a budget to pay off your credit card balance during the no-interest intro period by paying more than the required repayment noted on your statement.
Does applying for a balance transfer cards make my credit file worse?
Applying for a balance transfer card will recorded as a new inquiry on your credit file. This can cause your credit scores to drop by a few points however doing it once off is not likely to have a negative impact. Beware, if you do balance transfers regularly (once a year can be considered regular if you don’t have any other credit enquiries noted) this will potentially have an adverse impact on your file and lead to difficulties when applying for a mortgage.
What should I do if I don’t get a high enough credit limit to transfer all my credit card debt?
You may get approved for a balance transfer credit card only to find out the new credit limit is lower than your requirement. In this case, we suggest transferring what you can and budgeting for how you’re going to pay down the debt remaining on your high-interest card, in addition to the balance you transferred. Alternatively, you may want to consider a personal loan and if you are fortunate enough to have a mortgage with sufficient equity available, you can take a secondary home loan over a shorter term and payout the credit cards.
The main reason to transfer credit card balance is to save money, not spend more. Here are some tips to save on fees and interest on doing balance transfer.
Pick a card that offers no Fee balance transfer
Consider a balance transfer card that has an intro $0 balance transfer fee for a certain time frame, or waives the fee altogether. Pay attention to when you’ll need to request the balance transfers to take advantage of the intro $0 balance transfer fee offer, it’s typically within the first couple of months.
Take a 0% interest over low rate offers
Look for cards that offer a 0% introductory interest rate period on balance transfers (intro offers typically range from 6 to 12 months). But be aware that you’ll get a different rate on balance transfers after the intro period ends. For example, say your card offers an intro 0% rate on balance transfers for 9 months from account opening. After 9 months, your balance transfer rate changes, to a variable 21% on balance transfers. You’ll want to make sure to pay off your balance transfer before the intro period ends, otherwise that 21% rate will kick in for any balance. This could negate the savings from transferring your balance if you do not pay if off during the introductory period.
Review the card’s terms and conditions before applying for the card and transferring your balance, so that you’re prepared for the different rates that may apply to your balance and when they apply. If you miss payments, the provider may charge a penalty rate. And as part of the penalty for late or missed payments during an intro period, the provider may also cancel your 0% intro offer.
A card may offer a 0% intro rate to help you pay off a balance transfer, but if the intro 0% doesn’t apply to purchases you’ll have a different rate for new purchases you charge to the card. Weigh any potential rewards you can earn by making purchases on the card with how much interest you’ll pay on those purchases. Most credit card providers offer 0% on balance transfer and purchases over the introductory period, these provide better value over offers that only covers balances transferred.
Paying off the new balance transfer card
Even if your card charges an intro 0% rate on balance transfers and purchases, you should still make at least the minimum monthly payment on time. Hint, set alerts to help you remember these on your phone. Keep in mind that to pay off your transferred balance before the intro no-interest period ends, for this you will need to pay much more than the minimum each month.
Something else to consider, requesting a transfer can be a speedy process, but in some cases, it may take several weeks to complete that’s why it’s important to keep making at least the minimum payments on your original card on time, until the transfer is completed on that account.
Finally:
Intro rates, fees, the amount you can transfer and other terms can differ from card to card. Before you apply for a new card, check the terms and conditions for fees, rates and any restrictions on transfers. Look for a card that can make a balance transfer work for you.
A balance transfer can be a good option to consolidate your credit card debt and pay it off more quickly. Credit cards are classed as unsecured debt that is a revolving line of credit. If you don’t have the option of consolidating the debt with a short term loan by refinancing your home loan, consider taking a personal loan so that any significant credit card balance is actually paid out over a fixed period.