Eliminating credit card debt can be challenging, especially when lots of bucks go towards the interest. In such situations, a credit card balance transfer can be a valuable financial strategy to consider.
This guide will tell you everything you should know about credit card balance transfers, from how they work to their potential benefits and drawbacks.
What is a Credit Card Balance Transfer?
A credit card balance transfer is a process of transferring the balance of your one credit card to another that has lower interest rate. The primary objective of a balance transfer is to reduce the cost of carrying credit card debt by taking advantage of the 0% introductory APR provided by the new card.
How Does a Balance Transfer Work?
Here’s a step-by-step breakdown of how a credit card balance transfer typically works:
- Choose a New Credit Card
Start by researching and selecting the best balance transfer credit card. Look for cards with introductory 0% Annual Percentage Rate (APR) or significantly lower APR for balance transfer transactions. These promotional rates can last from a few months to over a year.
- Apply for the New Card
Apply for the card you have selected and wait for approval. Keep in mind that approval depends on your creditworthiness. This means, a good credit score can boost your chances of approval for the card.
- Gather Account Information
Once approved, gather the necessary information about the existing credit card with the high-interest balance. This includes the account number, the amount you wish to transfer, and the payee information.
- Initiate the Transfer
Contact the new credit card issuer, either online or by phone, and request a balance transfer. You’ll provide the details of your existing credit card account and specify the amount you want to transfer.
- Wait for the Transfer
The new credit card issuer will process your balance transfer request. This may take a few days to a few weeks, depending on the card issuer’s policies.
- Continue Payments
Keep making payments on your old card until you receive confirmation that the balance transfer is complete. Missing payments can result in late fees and negatively impact on your credit.
- Pay Attention to the Introductory Period
During the introductory period (with a 0% or lower APR), focus on paying down the transferred balance as much as possible. This is when you can save significantly on interest charges.
Pros of a Credit Card Balance Transfer
A credit card balance transfer offers several advantages, including:
- Lower Interest Rates
By transferring your balance to a card with a lower APR or a 0% introductory rate, you can reduce the interest on your debt, saving you a huge amount of money.
- Simplified Payments
Consolidating your credit card debt onto one card simplifies your monthly payments, making it easier to manage and budget for.
- Debt Payoff Strategy
The reduced or 0% APR period gives you a strategic window to focus on paying down the principal balance, helping you make significant progress in reducing your debt.
Cons of a Credit Card Balance Transfer
While credit card balance transfers can be beneficial, they also come with certain drawbacks:
- Balance Transfer Fees
Many credit cards charge a balance transfer fee, typically around 3% to 5% of the transferred amount. Be sure to factor in this cost when considering a balance transfer.
- Short Introductory Period
Promotional APR periods don’t last forever. Once the introductory period ends, the interest rate on the transferred balance will revert to the card’s standard rate, which may be higher than your previous card’s rate.
- Impact on Credit Score
Opening a new credit card and transferring a balance can affect your credit score. The new credit inquiry and changes in your credit utilization ratio may temporarily lower your score.
Tips for a Successful Balance Transfer
To make the most of a credit card balance transfer, follow these tips:
- Choose the Right Card
Select a credit card with a promotional APR period that aligns with your ability to pay off the transferred balance.
- Read the Fine Print
Thoroughly review the terms and conditions of the balance transfer offer, including the length of the promotional period, balance transfer fees, and the post-promotion interest rate.
- Budget Wisely
Create a budget that allows you to pay off the transferred balance before the promotional period ends. Calculate how much you need to pay each month to achieve this goal.
- Avoid New Debt
Refrain from using the new credit card for additional purchases until you’ve paid off the transferred balance. Focus on debt reduction.
- Monitor Your Progress
Regularly check your credit card statements and keep an eye on the remaining balance. Ensure that payments are applied correctly and that the transfer process is going smoothly.
- Plan for the Future
Once you’ve paid off your debt, decide whether to keep the new card, close it, or explore additional balance transfer options if needed. Use this experience as a stepping stone to better financial habits.
Bottom Line
A credit card balance transfer can be a valuable tool for managing credit card debt and saving money on interest charges. By understanding how balance transfers work, weighing the pros and cons, and following best practices, you can use this strategy to your advantage and take significant steps toward becoming debt-free. However, it’s crucial to be diligent, budget effectively, and commit to reducing your debt during the promotional period to reap the maximum benefits of a credit card balance transfer.
For more information and tips to help you choose the best credit card in NZ, visit our website Credit Cards Compare.
