Credit card balance transfers: Here’s how they work

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Credit card balance transfer
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Balance transfers are a method to move your balance from one credit card to another. There are some costs involved so it is important to understand when a balance transfer might make sense and when you should avoid them. Continue on for a lesson on balance transfers and options for how to use one to your financial benefit while avoiding a landmine of potential costs.

What is a balance transfer?

A balance transfer is a way to move a balance from one credit card to another. You can sometimes move other types of balances outside of credit cards, but for today, we are going to look exclusively at credit card balance transfers. Just be aware that there are other types of balance transfers and they generally work in a similar way.

RELATED: What is a ”˜good’ credit card?

With a balance transfer, you pay off one credit card with a check or electronic transfer from another credit card. This effectively transfers the balance from one card to another. At the end of a balance transfer, you end up not all that far off from where you started: owing that amount of credit card debt, most likely with a small balance transfer fee added on top.

Because a balance transfer is just moving debt around, not paying it off, it doesn’t offer a lot of huge benefits. But there are some situations where a balance transfer could save you money, which is the only time a balance transfer makes sense.

When do balance transfers make sense?

Balance transfers make sense in a limited number of scenarios when they can save you money. If you can afford to just pay off your credit card in a relatively short period of time, that is generally a better option than a balance transfer. The ideal credit card balance for your credit score and your personal finances is $0.

However, if you are currently carrying a large balance on your credit cards and find yourself paying expensive interest charges every month, balance transfers can offer temporary relief and a path to debt freedom. This opportunity comes in the form of the 0% APR introductory period offered with a handful of new credit cards.

Let’s look at an example of how this would work. Let’s say you owe $7,000 on a credit card that charges 15% interest. You can open a new credit card with a 12-month 0% APR introductory period, but it comes with a 2% balance transfer fee. This means you can move the funds to the new card for a $140 fee, and avoid a little over $1,000 in annual interest on the balance. Because you save more than you spend, in this case, the balance transfer makes sense.

When to avoid balance transfers

Do not move your debt to another credit card if it won’t save you money as in the example above. Most cards let you do a balance transfer at any time, but unless you are moving to a lower interest rate, ideally a 0% interest rate, you should never do a balance transfer.

Also beware of the interest rate after a 0% APR period ends, the balance transfer fee, and other costs that might come from the new card. A large balance transfer fee could offset your savings depending on the interest rates and balance, so do the math before you get the balance transfer started.

What to look for in balance transfer credit cards

Balance transfer credit cards are easy to find with a quick search, but not all balance transfer offers are created equal. The places to look for are the duration of a 0% APR period, balance transfer fees, and the interest rate after the 0% period ends.

Among cards with a 0% APR introductory period for balance transfers, you are likely to find 0% periods ranging from around 3 months to over a year. Try to choose a balance transfer offer that is on the longer side of the spectrum, with 12 or more months at 0% APR to pay off your debt with no interest charges.

Balance transfer fees can easily reach 4% of the balance transferred, so review the fees before applying for a new card. The best balance transfer cards offer a no fee transfer, which is a huge benefit if you choose to go the balance transfer route.

With a focused effort, you may be able to pay off your balances completely before the 0% period ends. If you can’t, however, you don’t want to end up paying more interest than you do today. Compare the interest rate of the card with your current interest rate to get an idea of which will charge less in the future.

Balance transfer credit cards to consider

If you want to put your own balance transfer together, you have a few great balance transfer credit cards to choose from! Here are some top choices today:

Chase Slate® – 15-month introductory period at 0% APR. No balance transfer fee for the first 60 days.

American Express EveryDay® – 15-month 0% APR introductory period. $0 balance transfer fee.

Discover it® – 18-month introductory period at 0% APR. 3% balance transfer fee.

Citi Diamond Preferred® – 21-month introductory period at 0% APR. 5% balance transfer fee ($5 minimum).

Treat balance transfers with care

Balance transfers can save you a bundle of cash if you use them right, but they can also lead to fees and higher interest rates in the long-run if you don’t act with care. Pay attention to the details and do the math before you do the transfer. If you follow that formula, you will quickly understand whether a balance transfer makes sense for you or if it is something you should avoid.

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