What is a balance transfer?
A balance transfer is when you take the balance on one credit card and transfer it to another card with a lower interest rate. The most common usage of balance transfers is to open a new credit card with an introductory rate or a lower interest rate than your existing accounts have, and transfer the balance over to save money on your interest payments. Doing a balance transfer is a great way to reduce your overall debt and lower your monthly payments.
How to use a balance transfer
There are some facts and stipulations about balance transfers that you need to keep in mind if you are going to successful at using a balance transfer to save money.
- While there are occasionally 0% balance transfer offers, most balance transfers cost 3% of the balance being transferred. If you are transferring a balance of $10,000 from a card with a 15% interest rate to a card with no interest for one year, you are effectively reducing your interest by 15% for an entire year and paying an initial 3% (or $300 in this case). This is obviously a smart move if you think you can pay off the balance or the majority of the balance within one year.
There are obviously cases in which this would not be a smart move. For example, if you are able to pay off the whole balance within a few short months, you may save more money by paying off the balance in full than incurring the 3% balance transfer fee.
- Some banks allow you to do balance transfers for just about any type of loan. You can transfer the balance of your car loan, furniture loan, or just about any other monthly installment loan. You would just take a check from the credit card issuer and send the check to your creditor for the loan. Most people believe that you can only do a balance transfer from one credit card to another, but that is incorrect. However, only certain banks give you the option to cut a check while many do require you to go from card to card, so you have to do your homework on this.
- Many cards offer 0 percent balance transfers for a certain period of time, but the 0 percent does not necessarily apply to new purchases. Make sure to read the fine print on this issue. Those balance transfer introductory offers can be great, but be careful not to spend any money on that new card without knowing if you will have to pay interest on the purchase.
- It is a bad idea to transfer the same balance again and again. Banks are looking for this type of activity. If you are opening new accounts often and transferring high balances, banks will definitely see you as a risk. You might think it would be a great idea to just keep opening a new card every year with a 0% interest rate and keep transferring the balance, but it would not be wise in the long term. Balance transfers are best for those who want to aggressively pay down their debt.
- If you make even just one late payment, you could lose your introductory rate. Not only would you have to pay a late fee, but this would also completely defeat the purpose of having performed a balance transfer. Definitely make sure that you set up an auto payment schedule when you get your new card. You would not want to transfer a balance to a 0% interest rate card just to make one late payment and go right back to paying 15% interest like you were on the old card. This would be especially painful if you also got hit with the standard 3% fee. Ouch!
Can I transfer a balance on one card to another card at the same bank?
You receive an attractive offer in the mail from your bank. A 0% balance transfer to a new credit card! You get excited, because you have a large balance that you are paying exorbitant interest rates on. But alas, you cannot transfer the balance because banks do not allow balance transfers within the same institution.
Is there a law preventing this?
There is no law preventing this behavior. The real reason that banks don’t allow this is quite simple really. Let’s think about why banks would make such an offer to someone. They offer an enticing 0% interest rate for 15 months to get you to move your debt to their bank. They can only hope that you will not pay off your debt and that by the end of the 15 months you will start paying them interest on the debt that you still have left, or even that you will just make some purchases with your new card.
In many cases, the banks win in this scenario because people often do one of two things after transferring a balance:
- They think that they can just transfer it again later so they leave it untouched and unpaid
- They spend more money on the card that the balance was transferred to, not fully understand that the card is not a 0% interest card, and that the 0% only applied to the balance transfer.
Doing either of these things makes for a bad situation for you, the borrower.
If you keep transferring the balance, eventually the banks will catch on and stop you from doing it in the future by not approving your applications. This will put you right back at square one and you were paying transfer fees all along.
If you spend more money on that card, you will end up owing more money and increasing your debt. You will have to pay interest on this debt and you have now defeated the purpose of doing the balance transfer, which was to try to save money and lower your overall debt, wasn’t it?
Be smart with your balance transfers
Balance transfers can be a very useful method of tackling credit card or other types of debt. They can help you save money on interest rates and ultimately help you pay off your debt faster and more effectively. However, you must use caution when using this tactic. There are many ways that you could potentially harm yourself further by not paying attention to the fine print, both literally and figuratively. Take the time to research and understand what balance transfers are all about, and make sure that you know exactly what you are getting from a bank before you apply for one. Once you get approved, make sure to follow these rules so that you can pay off that old debt and save hundreds if not thousands of dollars in the meantime. Your wallet will thank you, and so will your spouse.