There are many different types of credit cards out there – and even if you are a little bit careful, you may end up with one that can trap you into unfavorable contracts, annoying penalties or worse. How can a savvy consumer get out of one of these less-than-ideal credit card contracts?
If this scenario applies to you, it could be time for you to consider getting a balance transfer credit card. Not only do these types of cards allow you to switch from one credit provider to another, but they usually try to make it as easy as possible for you to do so without piling on too many unnecessary fees.
Why choose a balance transfer credit card?
Usually, the only reasons that you may need to switch to a balance transfer credit card are if you dislike your current credit card plan or if you know of a credit card plan that will give you better benefits than what you are already receiving. Credit cards can be an excellent way to allow consumers to purchase items that they may not always have the immediate funds for. However, you may be wishing for a better solution if:
- You have a bad interest rate with your current credit card.
- You have a particularly high amount of debt on your current credit card.
- You have multiple store credit cards with varying rates and would like to consolidate them into one payment.
This is where balance transfer credit cards come in.
A balance transfer card is not too different from a normal credit card. In fact, many credit cards already come with a balance transfer option. However, dedicated balance transfer cards typically have better terms than regular credit cards, allowing you to pay off credit card debt from other cards for a much lower fee. They also typically offer lower interest rates than regular credit cards, which acts as an incentive for you to transfer a credit balance to the card.
Balance transfer rates: how much should you pay?
Depending on a variety of factors, you may have to pay two different kinds of fees for transferring your credit card balance – one is a balance transfer fee and the other is an annual percentage rate (APR).
For a balance transfer fee, the company you are trying to switch to may need to charge a certain percentage of the balance that is being transferred into your new account. This makes sense, as your new credit card company often requires some level of payment in order to provide you with the service of removing your liability to your old credit card provider.
While some credit card companies do not charge this fee, most do at a rate of roughly 3 to 5 percent of the amount that is being transferred. If a credit card company does require this fee, it will typically introduce it gradually by adding it in small increments to your new monthly payments. Therefore, it is important to consider how much additional money the transfer fee is going to cost you in the long run.
The second type of fee that could arise from a balance transfer is an APR. These fees are quite common in many different fields (such as car sales, for example), but they are easy to misunderstand. Some important facts to know about APRs are:
- They represent how much interest you need to pay for the credit card: Chances are, you decided to switch to a new credit card company because your old card had undesirable interest rates or poor business practices. Make sure the new card you are transferring your balance to has a better rate and that said rate is not going to vary significantly later on.
- They vary depending on your credit score or other factors: Different cards have different APRs – and you may be eligible for better ones with lower rates if you have a good, established credit score. Additionally, if you have a more reliable income or lower amount of debt, your APR may be lower as well.
- They often have a “promotional 0 percent rate” at the beginning: One of the biggest draws to getting a balance transfer credit card is that they often offer a 0 percent APR at the beginning of your contract. This means that for the duration of their promotional period, which usually runs for several months, you will not need to pay any interest on your current credit card balance and can focus on paying off your debt.
Simply put, balance transfer credit cards are only worth it if you are going to be paying less in the long term by switching to your new credit card provider. Being smart with your selection will make you much more financially stable, especially if you cannot pay the entirety of your debt within your “0 percent APR” period.
How to Make a Balance Transfer
Once you have decided to make a balance transfer, you must speak with the new credit card company and accept its offer. Then, the company will make contact with your existing credit card company and pay them the amount you owe or a portion of that amount. This may take as long as two weeks to process, so it is important to make any new payments that are due to your creditors during this time.
A crucial factor to consider is that many balance transfer credit cards will have a credit limit associated with them. For example, if your new card’s limit is $6,000 but you have $6,500 in existing credit card debt, you will only be able to transfer $6,000 worth of your debt to the new card. This also means that you will still be responsible for paying off the remaining $500 on your old card using your old card’s interest rate.
Additional Balance Transfer Card Considerations
It can be difficult to choose the right balance transfer credit card for you because of how many different features the cards can offer. Some cards prioritize long 0 percent APR periods, but they may have higher transfer fees. Other cards prioritize low or nonexistent transfer fees but have higher interest rates.
Finally, other cards provide different incentives, such as giving you cash back, airline miles and more for each purchase you make. Understanding what your priorities are when you want to pay off your credit card debt and knowing the different costs of different cards are ultimately the best ways of deciding which credit card is right for you.