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How Do Balance Transfers Work?

Find out how to pay off credit card debt fast with a balance transfer and whether it’s worth it

A big credit card bill can be scary, especially if you’ve fallen on tough times and are struggling to make ends meet. If you’re looking for the best way to pay off credit card debt, consider a balance transfer—this lets you move your balance owed onto a new card, so you can pay it off bit by bit while delaying or avoiding interest charges.

If that seems too good to be true, read on to get an understanding of the details. Balance transfers usually cost a fee up front and will charge interest after the promotional period ends. That being said, they are excellent debt reduction tools when used wisely. Here’s how to turn an impending credit card catastrophe in your favor and emerge debt-free with minimal costs.

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  • Find a New Card from another credit card company or financial institution offering a deal on balance transfers. For example, companies often provide a promotional 0% interest rate for a certain period—say, 12 to 18 months—for opening a new credit card. Borrowers with good credit scores (690 and above) can qualify for the best terms and rates.
  • Apply. Shop around for cards that offer balance transfers and apply for the one that best fits your needs. Remember, you must apply for a card with a different company than your current card with the balance to qualify for a balance transfer. Once the company accepts your application, you can initiate the transfer online or on the phone. Some companies even allow you to initiate the transfer when you apply for the card (meaning they'll initiate the transfer if they accept your application).
  • Wait. You'll wait about two weeks for the balance transfer to complete. At the end of the process, your new card pays off the old card's debt, and now you owe the new card instead. Doing so can save you money because you're paying less interest or even none at all during that introductory period.
  • Repay. Last, don't forget to pay attention to the clock! When that promotional period ends, the interest rate might go back up, so it's a good idea to pay off the balance while your rate is low.

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A balance transfer is worthwhile if it saves you money compared to keeping your balance on your current card. Remember, the goal is to pay down your debt as quickly as possible with minimal costs. Here are the factors that come into play in these situations:

  • Length of Promotional Rate: Imagine this as the "honeymoon phase" of your balance transfer. You'll have a low or 0% interest rate on the transferred balance for a specific period. The longer this period, the more time you have to chip away at your debt without interest piling up. So, a longer promotional rate is generally better for you. Aim for the longest one you can find!
  • Upfront Fees: These fees are like the admission ticket to the balance transfer show. It's a percentage of the amount you're transferring, and you pay it so the company implements the transfer. For example, a 3% transfer fee on a $5,000 balance is $150. However, don't let upfront fees scare you away. One month of APR on a typical credit card is a charge of 20% or more on your balance, so transferring it can help you avoid more costly interest.
  • Post-Promotion APR: When the promotional rate expires, a new interest rate kicks in. You want this rate to be as low as possible because once it starts, any remaining balance will start accruing interest. So, look for a card with a reasonable post-promotion APR or plan to have paid off the balance by then.
  • Annual Fees: Some cards charge an annual fee just for the privilege of having the card. If the card you're considering has an annual fee, make sure to compare it to the potential savings from the balance transfer. It might still be worth it, but you want to be sure you're getting your money's worth.

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When considering balance transfer offers, it’s easy to get lost in the promise of financial relief. However, it’s essential to remember your goal: ridding yourself of debt as cost-effectively and quickly as possible. As a result, a balance transfer only makes sense if it lowers interest costs.

Another upside is that transferring two or more balances to a new card is the consolidation of debt, streamlining your debt management. In other words, paying one monthly installment is easier than paying on five separate credit cards.

Generally, good credit is needed to access balance transfers. Borrowers with weaker credit might not qualify. In these cases, debt consolidation programs may be available from non-profit organizations and financial institutions in your area.