Published on March 16th, 2021 | by Sunit Nandi0
How Does a Balance Transfer Credit Card Work
CNBC reports that more than 120 million Americans have existing credit card debt—this accounts for nearly half of the general population of working adults in the country. What’s worse is that a good percentage of these adults never fully pay off their card dues and fees.
In most cases, debtors strive to make the minimum payment on their card fees, rather than eliminating the total debt amount.
There are many reasons as to why a cardholder might not be able to settle their credit card balance, but one of the most common ones is a bad payment term. Too many people get tricked into signing up for accounts with high-interest rates.
Poor payment terms are often paired with short-term benefits such as easy application processing, waived annual fees, or high credit limits. However, you shouldn’t feel ashamed if you have gotten sucked into the allure of high-interest cards as well. It’s never too late to fix your credit mistakes.
One of the simplest, most effective ways of improving your credit standing is doing a credit card balance transfer. It’s the process of transferring your existing credit card debt to another credit card account with lower interest rates, no annual fees, fair credit limits, and an overall better payment term. If executed properly, it can help debtors achieve financial freedom much faster.
Does a credit card balance transfer seem like something that would help you get rid of debt? Keep reading to learn more about the pros and cons of credit card balance transfers, the proper way to execute the process, and the multiple factors debtors need to take into consideration.
How to Perform a Credit Card Balance Transfer
Step 1: Sign up for a Card With Better Payment Terms
Debtors can essentially transfer their existing debt to any card they want. However, if you want to get the most out of your credit card balance transfer, limit your options to those that offer 0% interest rate on balance transfers. These include the following:
Best Overall Option: Citi Simplicity Card
The Citi Simplicity Card is the ideal option for a wide range of debtors, from first-time cardholders looking for a new account, to long-time debtors who want to absolve their existing debt.
They have amazing payment terms. Cardholders won’t have to pay penalty APR charges, annual membership fees, and late fees for the duration of their account. Plus, the APR is only at 14.74% to 24.74%.
However, what truly sets them apart from the rest is their 21-month 0% APR on balance transfers. That means debtors have almost two years to pay off the debt they transferred before the account even starts accumulating interest charges.
Longest Low-Interest Rate Period: SunTrust Prime Rewards Credit Card
Do you feel like short-term 0% APR promos aren’t the best option for your debt consolidation plans? Try SunTrust Prime Rewards Credit Card. Cardholders get to enjoy a 36-month low-interest introductory offer of 3.25%—the longest option in the market. This promo is ideal for those who plan to use their new card even after they’ve paid off their debt.
The catch here is that cardholders won’t have a 0% introductory APR rate. Although, the low-interest promo might be more beneficial if you have a relatively low debt amount that you can easily pay off in a few months.
Safest Option for Good Credit Debtors: Bank of America BankAmericard
A common misconception about credit card bank transfers is that you have to find a new account that offers insanely low rates and unbelievably amazing promos. If you find a card that offers such, by all means, try it out. However, if you’re looking for something a bit more stable and reliable, try the Bank of America BankAmericard.
Cardholders get a 0% rate on balance transfers within the first two months of account opening. You also get a 0% APR on 12 billing cycles. The introductory promos aren’t amazing, but what sets this account apart from other options is the low recurring charges. APR is at a conservative 12.99% to 22.99%, while succeeding balance transfers are only subject to a 3% charge.
Step 2: Request the Transfer
After qualifying for and opening the new account, it’s time to request the transfer. The process varies on a case-by-case basis, so it’s best to reach out to your card issuer regarding this step. Although, in most cases, you’ll only have to provide the details of your old card.
Step 3: Make Monthly Payments
Finally, it’s time to make monthly payments. Remember: credit card balance transfers won’t automatically absolve all your debt and improve your credit standing. They’re simply a tool to help you reach financial freedom. No matter how amazing the terms on your new credit card are, you’ll have to actually make payments to yield results.
Opening a New Credit Card Account vs. Transferring to Existing Credit Card
Can you perform a credit card balance transfer to an existing account? The simple answer to this question is yes. Technically speaking, banking institutions allow debtors to transfer their credit card debt to any account they want—as long as the receiving account has sufficient credit available, of course.
However, transferring to an existing credit card might not be the best choice. Yes, opening a new credit card account might hurt your credit score, but transferring funds to an existing credit card carries a bigger risk of dragging your score down in the long run.
First, you’ll have to consider the APR percentage and current card balance. Let’s say you’re planning to transfer $2,000 from a 12% APR card to a 15% APR card with a 0% balance transfer rate and $4,000 existing debt.
Even if you manage to pay off the transferred $2,000 within the 0% introductory APR period from a balance transfer, the 15% APR will still affect the existing balance of $4,000. Considering your old card only has a 12% APR, you would have lost 3% on fees.
Second, measure your credit card utilization capabilities. Dumping all your credit card debt onto one account will cause your credit limit utilization ratio to spike exponentially. For example, let’s say you plan to transfer $2,000 to a card with $4,000 worth of debt that has a $10,000 credit limit.
Before the transfer, you were only using 40% of your limit. If you decide to push through with the transfer, however, you’ll end up using 60% of your credit limit. This spike would instantly hurt your credit utilization ratio and drag down your current credit score.
Finally, there are plenty of great credit card offers on the market. Don’t limit yourself to the ones you already have. Take the time to explore new promos and payment terms to see which account will help you reach your financial goals much faster.
How to Deal With Your Old Credit Card Account
Let’s say you’ve successfully transferred all your existing debt to a new credit card account with significantly lower interest rates. As long as you meet the monthly payments, you should be debt-free after a few months. What’s next? The answer: dealing with your old credit card account.
For many debtors, old credit cards are painful to keep. Not only do they bring bad memories, but they also tempt one to relapse and fall back into his/her old spending habits. That’s why some people would simply opt to cancel their card entirely.
From a psychological point-of-view, a complete do-over might seem like a good idea if it serves as the gentle push one needs to make better financial decisions. Think of it as starting afresh. However, from a banking perspective, closing your old account is a very wrong move.
The act of transferring credit card balance from one account to another does not negatively affect one’s credit score. However, closing existing cards do. Your new credit card application might have already caused your score to drop a bit, so electing to cancel your old credit card will only drag the score down further.
Not to mention that banks also look at a debtor’s card utilization. If you completely close your old account, your existing credit limit will take a steep drop and limit your purchasing capacity via credit. Thus, it limits your capacity to utilize credit.
We strongly discourage debtors from closing their old credit card account. There are plenty of other ways to manage your finances and control bad spending habits without negatively affecting your credit score.
Overall, a credit card balance transfer is a good strategy that debtors can use to get rid of their existing credit card dues and fees. If executed properly, not only will you absolve your credit card debt, but you’ll also have a shot at improving your credit score despite all your missed payments in the past.
However, debtors shouldn’t rush the process as well. We understand how frustrating being in debt can be, but performing balance transfers haphazardly will do more harm than good. Be patient and cautious. Avoid sleazy sales agents. As much as possible, only talk to reputable third-party credit consultants who have nothing to lose or gain no matter what card you choose.
Overall, the goal is to find a credit card account that offers better payment terms and will help you save money on monthly charges and interest rates. Do your research. There’s no reason for debtors to limit themselves to the options listed in this article.
Would you consider transferring your existing credit card debt to another card with better terms? Share your thoughts on credit card balance transfers with us in the comments section below!