Meaning of Balance Transfer

By W D Adkins

  • Overview

    As of 2008, the average American household had over $8,700 in credit card debt, with interest charges ranging from $1,000 to $2,000 per year. Credit card companies frequently offer low-interest balance transfers that lower those interest costs as an incentive to get you to open a new credit card account or increase your balance on an existing card. The meaning of a balance transfer can go well beyond saving a few dollars on interest. With some planning and discipline, you can use balance transfers to reduce or even eliminate your credit card debt without increasing your monthly payments.
  • Definition

    A balance transfer occurs when you authorize one credit card issuer to pay off all or part of the debt you owe on a second credit card. The debt is then added to your balance on the first card. You may transfer balances between existing credit card accounts to benefit from lower rates. Another option is to take advantage of an introductory low or zero-percent interest rate (usually for 6 months to a year) on balance transfers when you open a new account.
  • Features

    Balance transfer offers vary in their terms and costs. Normally there is a fee levied (typically 3 percent of the transferred balance), but some offers give you a limited number of free or reduced-fee transfers. Not all balance transfer offers extend the low or zero-percent interest rate to new purchases. It's also important to check on the regular rate that applies after the introductory period expires, as this rate may be a good deal higher. One feature of virtually all offers is that they are void if you are late on a payment. Miss a due date, and you can expect to start paying a higher interest rate immediately thereafter.

  • Benefits

    The interest savings from balance transfers can amount to several hundred dollars in a year's time. For example, transferring $3,000 from a credit card at 18 percent interest to one with zero interest for a year will save you $540. To maximize savings, transfer debt from your highest-interest credit card(s). With the best offers, your regular rate of interest will be lower as well. It's not uncommon for existing or new card offers to have permanent interest rates well below those on your high-interest cards.
  • Considerations

    Although you can buy more with the money you save on balance transfers without increasing your total credit card debt, in the long run this will leave you just as loaded with debt. It's also very easy to add more debt, since you suddenly have more available credit on the card from which you transferred a balance. Many people end up doing exactly that and find themselves owing more money and paying higher monthly payments.
  • Potential

    If you use balance transfers to your advantage, they can be the means to pay down the credit card debt you owe---and even pay it off entirely---without increasing your monthly payments. To do this, two steps are necessary. The first is that you must stop using your credit cards for new purchases. Second, continue making the same monthly payments you were making prior to the balance transfer. All of the money you pay over your new minimum payment(s) will reduce your credit card debt. Ideally, you'll have all your credit card debt transferred to a low-rate card. If that's not possible, put all of the extra payment amounts on the card with the highest interest rate. Once it is paid off, add that money to the payment on the card with the next highest interest rate until it is paid off, and so on. Most people can pay off their entire credit card debt within five years using this approach, and often in less than three years.
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