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How a Credit Card Balance Transfer Works

Posted by Freedom First Credit Union on Jun 16, 2021 8:00:00 AM
Freedom First Credit Union

balance transfer

Credit card debt is one of those things that can easily sneak up on you. This can especially be the case when you have high-interest credit cards in your wallet. Luckily, there’s a strategy you can use to get your credit card debt back under control and save money at the same time called a balance transfer.

 What is a Balance Transfer?

A balance transfer is a term used to describe moving the balances from one or more credit cards to a new credit card (usually with a much lower interest rate). The transfers themselves are easy to complete. It often only requires filling out an application or calling your financial institution(s) to initiate the transfer.


How Do Balance Transfers Work?

Balance transfers are usually completed in order to save money on interest or help you better manage your credit card debt. To illustrate how a balance transfer works, review the following example.

Assume you have three credit cards with balances totaling $10,000. Each credit card has a different interest rate.

  • Credit Card 1: $5,000 at 15% APR
  • Credit Card 2: $2,000 at 18% APR
  • Credit Card 3: $3,000 at 22% APR

With a balance transfer, you can move the balances from each of your three credit cards to a new card with a lower interest rate.

  • New Credit Card: $10,000 at 9% APR

Now you only have one monthly payment instead of three. Plus, your interest rate is much lower, allowing you to significantly save more on interest each month.

What are the Financial Benefits of a Balance Transfer?

There are several reasons people consider transferring balances from one credit card to another. Let’s review a few of the top reasons:

  • Manage Debt. If you have several credit cards, it can become challenging to keep up with the payment dates and various balances. By consolidating your balances into one credit card, it’s easier to manage your debt.
  • Pay Less Interest. Transferring the balances of several high-interest credit cards to a single, lower-rate card can significantly lower the amount of interest you pay each month.
  • Promotional Offers. Financial institutions will frequently offer incentives, such as 0% APR for six months. People will often transfer balances to these credit cards to use the interest-free period to help them get their credit card debt back under control.

While there are many perks to balance transfers, there are likewise precautions.


What Should You Consider Before Transferring a Balance?

Balances transfers offer a convenient means to managing credit card debt and paying less in interest. However, this tactic should be used responsibly and in conjunction with a larger strategy to eliminate your credit card debt.

A few things to consider before transferring credit card balances:

  • Transfer Costs. The special offer you receive for that 0% APR balance transfer may actually include expensive balance transfer fees. You must read the fine print and make sure the transfer doesn’t cost you more than you will save on interest. It’s quite common to find lenders with $0 balance transfer fees if you do your research.
  • Frequent Transfers. If you are transferring balances frequently, you may cause lenders to worry about your ability to repay your debts. They could see you as only juggling debt between cards versus trying to repay your balances advantageously.
  • Caps on Incentives. Many people participate in credit card churning. This practice is when you frequently open new credit cards to take advantage of bonus reward points. Many lenders are putting caps on incentives people can receive as a result. If you participated in this strategy, when you actually need the incentive to help manage your debt, it might be unavailable.


We’re Here to Help!

On the surface, a balance transfer may seem like the perfect option to help you better manage your credit card debt. However, there are other options available as well, such as debt consolidation through a personal loan.

Please stop by any of our convenient branch locations or call 540-389-0244 to discover which strategy will work best for your unique financial situation. At Freedom First, our goal is to help you make the right decisions to ensure your financial success.

Topics: Personal Finance, Debt Management, Credit Cards

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