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    How to Use Balance Transfer Credit to Reduce Your Debt

    A balance transfer is an excellent way to consolidate and pay down your credit card debt. It involves applying for a new credit card with a low APR and shifting all of your existing credit card balances to that card.

    A well-planned balance transfer can save you hundreds of dollars or more on interest payments. Let’s break down the process in more detail.

    How Does It Work?

    Doing a balance transfer isn’t difficult - but it does involve several steps. Here’s what you’ll need to do.

    • Apply for a balance transfer credit card with a lower APR than your existing card(s). A card featuring 0% during the first 12-18 months is an ideal option.
    • Your card issuer may ask you for the details of the balances you wish to transfer to the new card.
    • Once your new card is approved your card issuer will inform you that it’s now possible to do a balance transfer.
    • Some card issuers will pay off the balances on your other cards automatically. The sum of these balances will form the balance on your new card.
    • You may have an interest-free period that you can use to pay down the balance on your new card. Doing this will save you a significant amount of money in interest payments over the long-term.
    • Your card issuer may charge you a balance transfer fee. This is a percentage of the total balance you are shifting to your new card and usually maxes out at 5%.

    After your interest-free period expires you will be charged interest on any balance owing on your card. That’s why it’s best to pay down your debt as quickly as possible to maximize the amount of interest savings.

    How To Consolidate Debt Using A Balance Transfer Card

    The idea of a balance transfer involves moving debt held on one or more cards to another one. Borrowers pursue a balance transfer because many credit card companies will offer introductory 0.00% APR promotional periods.

    Let's say you carry $10,000 on a high APR card that you have been trying to pay down the balance on. Due to the high-interest rate, it can be difficult to pay off more than the monthly interest accruing on the card. By transferring this balance to cards with a lower APR and a 0.00% APR introductory rate it allows you to rapidly pay down the principal.

    Will Kind of Debt Balances Can Be Transferred?

    Any type of credit card debt can be transferred. This includes cards issued by banks, department stores, and often even gas cards. How much you can transfer depends on the available credit the card has.

    How Much Debt Can Be Transferred?

    The amount of transferable depends entirely upon the specifics of the balance receiving card and its issuer. The issuer will not allow you to exceed the credit cards limit. You may consider applying for a limit increase, but this will depend upon your credit.

    Some issuers will only allow you to transfer up to 75% of the cards limit including the cards current balance outstanding. For example, if a card has a credit limit of $10,000 and currently carries a balance of $2,000, you would only be able to transfer $5,500 from another card if you have a 75% limit.

    What To Look For When Choosing A Balance Transfer Card

    There are a lot of card issuers that offer a balance transfer credit card. It’s essential to know what features to look for when you consider your options. Here’s what a good card should offer:

    • An introductory APR of 0% - This is crucial because the interest-free period is your chance to pay down your debt without being burdened by a high APR. Almost every dollar you pay during the introductory period will bring down your balance instead of covering interest charges.
    • No annual fees - There’s no point in saving money on interest payments only to pay it out again in the form of annual credit card fees. Shop around until you find a card with a $0 annual fee.
    • A 0% or low balance transfer fee - Many card issuers will charge you a transfer fee of up to 5% on average - but others will waive this fee. You may find that the fee is 0% for the first few months of your introductory period.
    • A high enough transfer balance - Some card issuers won’t allow you to transfer your entire existing credit card debt balance to your new card. Make sure you know what your balance transfer limit will be before you apply.

    The ideal balance transfer credit card will have three zeros: 0% APR for the first year or 18 months, 0% balance transfer fees, and $0 annual card fees.

    The higher your credit score, the more likely you are to qualify for this type of offer.

    Disadvantages Of A Balance Transfer  

    This is a good way of consolidating your credit overall. However, there may be some disadvantages to using this method:

    • Low balance transfer limits - A limit that is too low means that you will only be able to pay off part of your existing debt.
    • Balance transfer fees - If the card issuer charges a fee you may not save as much as you originally thought.
    • It’s still a credit card - Credit card users who struggle to manage their spending may end up using the credit limit on their balance transfer card instead of paying it down.

    If you find that the balance transfer credit cards you qualify for don’t offer a low enough APR and fees or feel you may not be able to resist using the card for purchases, you may not get the maximum value from this debt consolidation method.

    Frequently Asked Questions (FAQ)

    How much is a balance transfer fee?

    A balance transfer fee usually ranges between 0% and 5% depending on your credit card issuer and FICO score.

    What happens when you transfer balance on credit cards?

    The old balances are moved to the new card. You can then take advantage of the interest-free period to pay down the new balance.

    What happens to an old credit card after balance transfers?

    Your old credit card accounts will remain open unless you contact the card issuers and close them. If there is still a balance leftover on the old card you will need to pay it down even if you close the account.

    What is a balance transfer APR?

    The best balance transfer APRs usually feature a special promotion period of 0% for the first 6-18 months. However, after the promotional period, the APR rate on balance transfers may rise to more normal credit card APR rates.

    What happens when my balance transfer offer expires?

    After your interest-free period expires, your regular APR will depend on your credit score and other factors.

    Will a balance transfer affect your credit score?

    A balance transfer shouldn’t have a major impact on your credit score. However, when you open a new credit card account the average age of your credit will go down. This could lower your score slightly over the short-term.