What is a balance transfer credit card?
A credit card balance transfer is when you move the money you owe (balance) on your current card to a new one. The most popular reason to do a credit card balance transfer is to take advantage of a lower interest rate on the new card, commonly termed an ‘introductory offer’. This strategy could save you money on interest and help get your debt paid off faster.
Introductory interest period explained
An introductory interest period refers to the amount of time after you open the credit card account when a zero or low interest rate is applied. This period doesn’t last forever, usually 6 months to two years, depending on the card. Once the introductory period ends, the interest rate increases; sometimes significantly.
You need to understand when the introductory period ends and what the new rate will be to make sure you can stay on top of credit card finances when the new rate kicks in.
Some cards also offer a promotional rate ‘for the life of the balance transferred’. This means the interest rate doesn’t have a specific end date; it continues until the transferred balance is fully paid off.
Why consider a balance transfer
A balance transfer can be an excellent tool (if managed wisely) when you’re struggling with a balance, high interest rate, and compounding interest on your existing credit card/s.
Many credit cards offer introductory 0% on balance transfers for a certain period, this window allows you to pay down your debt without accruing any interest.
Getting some breathing space on interest charges while paying off a big balance isn’t the only reason you might consider a credit card balance transfer.
Lower ongoing interest rates: If the card offers a lower interest rate (after the introductory period) than your current card, you can save on interest expense.
Bonus reward points: Certain credit cards reward balance transfers with bonus points. These can be redeemed for rewards like travel or cash back. Always weigh up if the value of these rewards is worth the potential transfer fees or a higher interest rate.
Consolidation of debts: If you have balances on a few cards, a transfer can simplify your debts. Managing one payment each month is easier than keeping track of multiple due dates. Not all cards allow you to transfer balances from multiple cards, though, so check the criteria to find a card that will let you.
What are the pros and cons?
Pros | Cons |
| Potential to reduce interest:Lower interest rates can result in substantial savings and more manageable debts. | Fees may apply:Transfers often come with fees, either as a flat rate or a percentage of the amount transferred. |
| May consolidate multiple debts:Consolidating several credit card balances into one simplifies debt management. | May lead to increased spending:The availability of new credit may tempt you to spend more, increasing your overall debt. |
| Could speed up debt repayment:More of your payment goes towards the principal balance, not interest, potentially hastening debt repayment. | High interest rate after the introductory period:After the initial low-interest period, rates often increase substantially. |
| Some card programs offer bonus rewards:These bonuses, redeemable for various rewards, can provide extra value. | Bad spending habits: A new credit card doesn’t fix bad spending habits, you will need to change the way you use your credit card in order to get control of your finances. |
Balance transfer limits
There is usually a limit on the amount you can transfer, which, depending on the provider, is usually a percentage of your total credit limit on the new card or a flat dollar amount.
Some cards also have minimum transfer amounts. It’s important to be aware of these limits as they might impact how effective your balance transfer strategy can be. For example, if your balance exceeds the transfer limit, you won’t be able to completely consolidate your debts onto the new card.
Let’s say you have a balance of $5,000 that you want to transfer to a new credit card. The new card has a total credit limit of $7,000.
Here’s how the balance transfer limit might apply in two scenarios:
Percentage of total credit limit: If your new card’s limit is $7,000 and you can transfer up to 70% of the limit, you can transfer $4,900 at most, not your entire $5,000 balance.
Flat dollar amount: If the issuer caps transfers at a flat $4,000, you can only transfer this amount, not the whole $5,000, even if the card’s limit is higher.
In both examples, balance transfer limits will stop you from transferring the full $5,000.
Always check the card’s terms for limits to see how it will impact your transfer strategy.
Tips to pay off your balance in the introductory period
- Calculate how much you must pay each month to clear your balance by the end of the introductory period.
- Set up automatic payments to ensure you never miss a payment.
- Focus on paying off the transferred balance and avoid making purchases on the new card until you’ve cleared the debt.
- Track your progress regularly and adjust your payments as needed.
How do I pick a balance transfer credit card?
Compare introductory periods: Look for the longest duration with the lowest rate that aligns with your repayment plan.
Understand the post-introductory rates: Make sure you know the regular interest rate once the introductory period ends.
Check for balance transfer fees: Some cards may charge a fee (usually a percentage of the transferred amount).
Evaluate the credit limit: Is it high enough to meet the balance you want to transfer?
Research any rewards or bonus offers: Some cards offer rewards that might add extra value for you.
With careful planning and disciplined repayments, you could be waving goodbye to that lingering credit card debt sooner than you thought possible.
