As the calendar year turns a new page, we are all looking for ways to give our finances a fresh start in 2021. If the sight of monthly credit card statements in your mailbox or inbox gives you fright, one way to save money in the new year is by transferring your high-rate credit card balances to a lower-interest card.
Balance transfers, if used wisely, can be a great tool to help you pay down debt, consolidate your bills and save money on interest payments.
Balance transfer basics
A balance transfer is a financial transaction that takes your debt balance owed to one lender and transfers it to a new lender.
Let’s say, for example:
- Clark owes $1,000 on his Macy’s store credit card, which carries a high interest rate of (yikes!) 28%.
- Clark transfers his $1,000 debt that he owed Macy’s over to ABC Credit Union’s credit card, who is offering a 5% APR balance transfer promotion for ten months.
- ABC Credit Union pays off his debt to Macy’s in full.
- Clark now owes his debt of $1,000 to ABC Credit Union. Instead of paying the 28% interest rate to Macys, Clark will be making his monthly payments to ABC Credit Union at the much lower interest rate of 5%.
A balance transfer is changing the destination of your debt to take advantage of a lower interest rate. It is not debt forgiveness, a personal loan or repayment. You aren’t getting rid of your debt, you’re simply moving it.
The savings can be huge.
Transferring your high-rate balances to a lower-rate card may allow you to pay off your debt faster and save hundreds—even thousands—on interest over the promotional period.
Let’s suppose you have a $5,000 credit card balance with an interest rate of 15.4%. If you pay only the $25 monthly minimum payment, it would take you 22 years to pay off your balance. And, over that time you will have paid over $6,010 in interest.
Now suppose that you transfer that balance to a card with a lower interest rate—for example, 10.4%. Assuming you continue making only the $25 monthly minimum payment, you’d pay off your balance in 21 years—a year early. May not sound like much, but with the lower rate in the end you would pay only $3,987 in interest. That’s a savings of $2,023!*
A balance transfer can help consolidate debt.
If you have multiple credit cards, keeping up with different payment dates can be difficult. And the penalties for late or missed payments can really add up.
Moving all (or most) of your credit card balances to one card can help simplify your payments. Instead of paying different credit card companies at various times throughout the month, you will now make one payment to one company. You will only have to remember one payment due date, with fewer bills to keep track of.
Do I need a new credit card to make a balance transfer?
You can transfer balances to a card that you already have, assuming you have enough available credit on the card. However, you may need to open a new credit card account to take advantage of that card’s special offer.
You may also feel stuck with your current credit cards, dealing with high interest rates and terms that don’t offer you much as a cardholder. A new card may offer a lower interest rate even after the promotional period ends, and more favorable terms. Even better would be to find a balance transfer card that offers perks and can earn you rewards.
Most financial institutions, including Tower, let you apply for a balance transfer at the same time you’re applying for a new card.
Be sure to read the fine print.
It’s standard practice for credit card issuers to charge a balance transfer fee. The fee is usually 3%-5% of the amount transferred, with a minimum fee of $5 to $10.
Let’s say you transfer $3,000 and there’s a 3% balance transfer fee. You’ll pay a $90 transfer fee at the time of the transfer. Considering how much you’ll likely save in interest, this fee is not usually a deal breaker—but it’s important to know up front what you’ll be paying.
If the balance transfer has a promotional period, be sure you know how long the promotional period lasts, and what your interest rate will revert back to when it ends. Some balance transfer cards come with an introductory 0% APR for a set amount of time. If you stick to a disciplined plan to pay off your debt, that period of no interest can help buy time so you can focus on tackling the principal balance instead of just paying the interest each month.
What you’ll need to apply
When you apply for a balance transfer, have this information handy:
- The creditor name (i.e., Mastercard®) and payment address (can be found on your bill)
- Your account number
- The amount you wish to transfer
Weigh the pros and cons of keeping your old card open
Opening and closing credit cards affects your credit score, so it’s important to think through the impact on your credit before closing any accounts. Closing credit card accounts can have a negative impact on your debt-to-credit ratio, which can lower your score.
Once you’re transferred your card balance, it may be better for you to keep the account open, and cut up your old credit card or keep it in a secure place that you cannot access easily (i.e., a safety deposit box).
Keep in mind that some credit card companies may close your account automatically after a certain period of inactivity, so you may need to make a small purchase every now and then to keep your account active.
If you struggle with overspending, ask a family member or friend to help hold you accountable and provide support. Enlist the help of a financial counselor to help you create a plan for paying down your debt.
Important! Don’t miss your last payment.
Balance transfers can take days or weeks to process, so don’t assume you can skip the next payment on your old card. Even after the balance transfer is complete, you may be responsible for residual interest that accumulated prior to the transfer.
Most likely, you’ll receive one more statement that you’ll need to pay. Missing this payment—even if it’s only a small amount—can mess up your credit just like any other missed payment. So be sure to keep checking your account until you see that the transfer has been processed and you have received a $0 statement from the old account.
Click here to find out how a balance transfer could save you money.
*Interest rates and balance transfer fees are for illustrative purposes only, and do not necessarily represent an existing or available interest rate.
Resources: Credit Karma, BALANCE, Bankrate.com, USAA, Money Under 30, St. George Bank