What Is a Balance Transfer?

One of the positive features of having more than one credit card is that there is a possibility that you can transfer the balances of one credit card over to the other card.

Many credit card lenders advertise this feature to develop new accounts and will often hand out promotional offers, such as a lower interest rate, to entice people to apply and then transfer a balance. There are pros and cons to do this, so let’s take a look at them to see if a balance transfer is right for you.

The Pros of a Balance Transfer

The immediate benefit of a balance transfer is that you save money. Whether it is from a promotional interest rate, the savings of a monthly minimum payment, or the long shot of having a portion of your balance forgiven, a balance transfer helps you to better manage your debt.

Balance transfers can help to save money over a long-term period instead of just a short-term period as well. If your current credit card APR is 22% and you can move all of that debt over to a credit card with a 2% promotional APR over 12 months, then you’ll save $110 in interest payments over that period for every $1,000 borrowed.

Balance transfers also give you a better flexibility in payment terms that you may not have otherwise had. Because the interest rates are often much lower, the overall minimum monthly payments are usually much lower as well. This allows you to keep your account balances current on even the leanest of income months.

Maybe the biggest advantage of a balance transfer, however, is the opportunity to pay off your debt more quickly. That can lend to a tremendous boost in your credit rating!

The Cons of a Balance Transfer

The primary detriment to a balance transfer is that you don’t actually pay off any debt when this happens. You’re simply changing the lender who holds the debt. Because it requires 2 credit cards for a balance transfer to happen, one credit card invariably ends up being empty and it can be extremely tempting to incur more debt because of that.

Balance transfer interest rates are often short-term, 12-18 months in most cases, but as little as 6 months sometimes, and then the APR can shoot up to a higher rate than what you were paying on the first credit card!

Balance transfers may be an indication that you’re trying to manage your debt, but for practical purposes in credit scoring, it may immediately lower your score before raising it. More open accounts, having a new account, and having one full credit card and another empty one can all cause a credit score to be several points lower.

Is a Balance Transfer Right For You?

If you have the ability to pay off your debt in the window provided by a balance transfer, then you could end up saving thousands on your repayment terms!

If the APR of your new credit card will be higher than your current one after the balance transfer window, however, and you don’t think you’ll be able to pay down the existing debt in time, then it may not be right for you at this time.

When used wisely, balance transfers can be a powerful tool to help you manage your debt. Consider using one today!

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