Money & Career

How credit card balance transfers work

By: Krystal Yee

© Photography Author: Canadian Living Credits: © Photography

Money & Career

How credit card balance transfers work

By: Krystal Yee
A credit card balance transfer occurs when an individual opens up a new credit card account, and uses the available credit to pay off another credit card.

Many people use credit card balance transfers as a way to take advantage of a lower interest rate, or to consolidate multiple credit card bills into one easy payment.

Why transfer your credit card balance?
Credit card companies offer low interest balance transfer rates as a marketing tool to bring in more customers and more accounts. The credit card company agrees to move your existing high interest credit card debt to a new account with an attractive low interest rate for a set period of time. This type of promotion is extremely profitable for credit card companies because oftentimes, consumers will not end up paying off their debt before the promotional interest rate expires.

However, if done correctly, credit bard balance transfers can be an excellent way of reducing debt quickly. More of your hard-earned money will go towards reducing the principal balance on the credit card, without incurring additional interest charges.

What you need to know before transferring your credit card balance
It isn't hard to find a new credit card that offers an enticing balance transfer option -- usually at 1 percent to 3 percent -- and you can even find some cards offering an attractive 0 percent.

When you decide to transfer your debt to a new credit card, there is usually a fee that will be applied -- usually between 1 percent and 5 percent, and it is based on the amount of money you plan on transferring. For example, if you wanted to transfer $5,000 to a card that charges a 3 percent transaction fee, you would be charged $150 for the transaction.

Don't miss credit card payments
If you are considering a balance transfer, it is extremely crucial to always make your monthly payments on your credit card.

Most cards will automatically increase the Annual Percentage Rate (APR) by up to 5 percent if you are late more than once within 12 consecutive billing cycles. Additionally missing payments might make you ineligible for the promotional rate.

How to take advantage of a credit card balance transfer
Obviously, the best way to take advantage of a balance transfer is to pay off your debt before the promotional rate expires. To do this properly, start by deciding what amount of debt you want to transfer, and then divide that amount by the number of months the promotional period lasts for.

For example, transferring $3,000 with an 8-month teaser interest rate of 0 percent, your monthly payment would be $375. Decide if that amount is manageable for you before you agree to the balance transfer.

In order for a balance transfer to be effective, you will need to stop relying on credit and start taking your debt seriously. If you cannot stop using your credit cards during the time when you should be utilizing the promotional rate, you will end up with more debt than you started with.

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How credit card balance transfers work