Before you apply for a credit card, it is important to research the company behind the card and to read through the contract.
You do not want to sign a contract that is unfair to you and traps you with unexpected fees or penalties. If you are already stuck in an unfavorable contract, however, you may consider applying for a balance transfer credit card. This type of card allows you to switch your credit card company without the hassle that comes with other types of loans. In addition, you may be able to avoid the unexpected fees of other credit cards.
Reasons to Apply for a Balance Transfer Credit Card
Most credit card owners do not normally apply for a balance transfer credit card unless they need a significant amount of help. They may be unhappy with their current credit card plans, especially if they find balance transfer plans that have better contracts and pose fewer risks. However, it is important to understand that these types of cards are meant to help lower a credit card user’s debt, not to increase it. A balance transfer card may be a good option if the applicant has:
- A very high interest rate on one or more existing credit cards.
- A large amount of debt on a card.
- Has multiple credit cards with varying interest rates and wants to consolidate them.
This type of card is similar to a standard credit card, because you will still have an interest rate and monthly payments. Some credit card companies offer a balance transfer option on an existing plan. While this may be an easy transition, you may not receive the best terms or interest rate with a dedicated balance transfer card. Cards that have the single purpose of a balance transfer may allow you to pay off your debt at a lower interest rate. A different company may offer you a lower interest rate as an incentive to switch providers. In effect, it is always a good idea to shop around and compare companies to ensure that you receive the best deal.
Fees Associated with Balance Transfer Credit Cards
In general, you are required to pay two types of fees: a balance transfer fee and an annual percentage rate (APR). The balance transfer fee occurs at the beginning of your contract. It is typically equal to a certain percentage of your total credit card balance. Most companies will charge this fee because they are removing the liability you had under your old credit cards.
In general, you will be charged between 3 and 5 percent of your total credit card balance. A company that does not charge this fee at the beginning may require you to pay it off each month in small increments, as part of your monthly payment. When researching different balance transfer cards, it is important to compare the balance transfer fees and see if one company will charge you more over a longer time period.
An APR, which is the second fee you will likely encounter, is your interest rate calculated over a year instead of one month. They are commonplace for car sales, home loans and more. There are three key components to APRs for balance transfer credit cards:
- They will give you an idea of how much money you must pay in interest over the life of the credit card. Hopefully, the APR on your balance transfer card will be lower than the APR on your previous credit cards.
- Your credit score and certain other factors will determine the APR you receive. In general, you will receive a better APR if you have a good credit score and make your payments on time. You may also qualify for a lower rate if you have a steady income and you do not have an astronomical amount of debt.
- Your APR may come with a 0 percent interest rate during a promotional period. The promotional period usually takes place at the beginning of your contract. If you make substantial payments during this period, you will lower the amount of debt that is subject to interest. The more you pay off during this promotional period, the less you will owe in the long run.
Keep in mind that a balance transfer credit card is only worthwhile if it offers an interest rate and fees that are lower than those on your current credit card. If you find a balance transfer card that has these features, you may be able to stabilize your debt and develop a plan to eventually become debt-free.
Performing a Balance Transfer
To begin the process, you must select a new credit card company from the ones you have researched and apply for its balance transfer program. If you are accepted, you must sign a contract. The company may then contact your current credit card providers and pay them each a lump sum for your debt. It may be important for you not to put new charges on your existing credit cards at this time. Transferring all your debt onto the new card may take as long as two weeks.
Note that your new balance transfer credit card will likely have a credit limit. If your debt is larger than the credit limit on this card, you will only be able to transfer up to the limit. As an example, you may have $6,500 in debt but your new balance transfer card only has a $6,000 limit. If this happens, you must pay off your balance transfer card as well as the remaining debt on your other credit cards.
Other Things to Consider About a Balance Transfer Card
Having a balance credit transfer card may help you keep track of your debt and gain a better understanding of the total amount you owe. However, it may be difficult to qualify for this card if you have poor credit. Or, you may be stuck with a high interest rate, even if you qualify. It is therefore important to improve your score before you apply for a balance transfer card, which may take some time.
Each balance transfer company you consider may also have different incentives available. For instance, you may receive cash back offers, airline miles and more for using the card. Make sure that you know your priorities in applying for a balance transfer, because they will determine the type of card you select.