What Is A Balance Transfer Credit Card?
Is it me, or does it seem like there is a ridiculous amount of credit card options?
Every time I look for a new card, I’m overwhelmed by all the choices. And that’s only going to get worse as issuers continue to innovate and introduce cards.
Looking for a rewards card? No problem. There are plenty of those. There are cashback cards, gas rebate cards, airline-branded cards, store-branded cards, cards for students, and cards that are great for travelers. And that’s just the tip of the iceberg!
Balance transfer credit cards are growing in popularity. According to the Bureau of Consumer Financial Protection, in 2018, the volume of balance transfers increased by about 38% to $54 billion, or about 9% percent of all credit card balances.
Balance Transfer credit cards serve a particular purpose. Therefore, there are fewer choices when compared to rewards cards. But that doesn’t make it any easier. Evaluating a balance transfer card requires you to understand its features. If you don’t, you might end up making larger interest payments then you ever expected.
What Is A Balance Transfer Card?
Balance transfers offer consumers a lot of benefits. They can help you better manage your cash flow and pay off debt. If you use several cards, balance transfers allow you to consolidate your credit accounts with one issuer.
Why do issuers offer balance transfer cards? Good question. Understanding the issuer’s motivation can help you make better choices.
Credit card issuers use balance transfers, and specifically the low-interest introductory periods, to lure customers away from competitors.
Balance Transfer Cards Have Two Main Benefits
Balance transfer cards allow you to transfer your outstanding balance from a credit card with a higher interest rate to one with a low introductory rate.
Balance transfer cards usually carry an intro rate of 0% for a period of 12 to 15 months. That gives you a break from paying your current, higher interest rate.
Since you are not paying interest during the intro period, you can use your savings to reduce your outstanding debt balance.
Remember that the regular interest rate will kick in after the intro period ends. That means the regular rate will apply to any balance you’ve accumulated, including the transferred amount.
Most credit card companies expect you to complete the transfer within the first 30, 60, or 90 days of account opening.
Balance transfers are also attractive to folks that carry several credit cards.
Why? It’s hard to manage a bunch of accounts effectively. I get a headache just thinking about keeping track of all the passwords, terms, and rewards offerings.
Let’s say you currently have three credit cards and carry a balance of $500, $1,000, and $2,000. It isn’t easy to manage payments and maximize rewards across three cards.
So, you decide to transfer your total balance of $3,500 to one card. A single card is much easier to manage.
Look Out for Upfront Transfer Fees and No Grace Period
All balance transfers charge an upfront fee. The size of the fee depends on the card.
Generally, the upfront fee is the greater of $10 or 3% to 5% of the amount transferred. It’s rare, but some cards offer introductory no-fee balance transfers.
Another potential hidden cost is the lack of grace period for new purchases. The grace period is a window of time in which you can avoid paying interest if you pay your balance in full. It typically lasts about 25 days.
However, balance transfer cards don’t offer this benefit, so anything new you buy will start incurring interest charges on day 1.
What Kind Of Credit Score Do I Need For A Balance Transfer Card?
Most balance transfer cards require a better than average credit score. Keep this in mind before you apply. Ever credit card application creates a hard inquiry that lowers your credit score by a couple of points.
Tip: Avoid Making New Purchases After A Transfer
Hey, I’d Like To Lower My Interest Payments. What’s The Best Way To Do This With A Balance Transfer Card?
The best way to use a balance transfer card is to pay off as much debt as possible during the intro period.
The intro period allows you to carry a balance for no interest for 12 to 15 months. After the intro period ends, your transferred balance will start accruing interest at the regular APR. So, if you haven’t used your savings from the intro period to lower your debt balance than you haven’t used the card for its intended purpose.
Tip: Don’t Make Late Payments After A Transfer
Avoid making late payments at all costs. Late payments can trigger the intro period to end. If this happens, your transferred balance will start incurring interest at the higher rate nullifying your entire reason for choosing a balance transfer card.
No matter what your credit profile is, it would be best if you kept an eye on balance transfer offers. You might find a use for one someday.
This is especially true in today’s economy. According to Experian, most lenders generate the majority of their profit from 20% to 30% of consumers.
That makes balance transfers very lucrative for issuers if they can attract the right customers. In other words, issuers are going to throw the most attractive transfer terms at you!