How Do Balance Transfers On Credit Cards Work?

Category: Credit Card

We’ve spoken a lot about the importance of getting out of credit card debt, but how do we actually do it? Well, here’s one strategy; a credit card balance transfer. This strategy might be foreign to many people, hence this article is specifically designed to answer those questions.

What is a balance transfer?

A balance transfer is officially defined as the action of moving your balances from one or multiple credit cards to a single card that offers a lower interest rate for a fixed period of time. With a low interest rate, sometimes you can even see balance transfer offers at a 0% introductory interest rate.

When used wisely, this consolidation technique can make it easier for you to be on top of payments.

In theory, a balance transfer can help you save a lot of money while you buy some time to pay off your debt. But, in this capitalistic world, credit card companies don’t just do it for free; there might be associated incentives as a way to make them money.

The psychology of balance transfers

Although many credit card companies do offer a 0% introductory interest rate, that % can grow exponentially after the introductory period. Because of that, if you don’t stick to your initial plan and pay that debt off, you’ll end up with even more debt really quickly.

This detail in the fine print gets glazed over easily and people get too comfortable seeing the “new” lower interest rate, thinking they’ll have more time to pay. So it’s really crucial that you know this information and don’t get complacent with a short-term benefit.

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How to do a balance transfer safely?

By a safe balance transfer, we mean doing it responsibly so that you’re not caught off guard with the details.

1. Create a payoff plan

In other words, this is your strategy to pay off your balance in full before the introductory period expires.

Calculate how much you need to pay off your balance, down to the penny because if you can’t, you’ll most likely end up paying more and it defeats the purpose of a balance transfer.

2. What are the balance transfer fees?

Another important question to ask is, “How do credit card balance transfers work in terms of fees?” Generally, balance transfer agreements require you to pay a percentage of your balance, labelled as processing fees.

Then another question follows, “Is it worth it? Is the money I’ll save more than the balance fee?” After all, what we’re trying to do is to achieve net savings. But occasionally, you’ll be able to find balance transfer programs with no transfer fees.

3. It’s not an excuse to go shopping

A balance transfer is arguably one of the last measures you can take to minimise your outstanding balance and interests. It is not an excuse for you to hit the mall just because the interest rates are 0%. When you add more and more to your credit card tab, the debt hole just becomes deeper and deeper and further prevents you from paying it off.

Because you also have to think about “What if I still can’t pay off my balance after the balance transfer? What do I do then?”

Alternatives to a balance transfer

1. Consider paying off your balance on this card

Remember, credit card companies are out to make money, so the more you can’t pay back, the more they’ll make, and a balance transfer is just one of their ways to do that. A balance transfer program is a strategy for them to maximise the amount of money you’ll need to pay them.

If your gut feeling or your calculation tells you that it’s not worth it, just don’t do it.

2. Negotiate for a lower rate

Again, this goes back to your history, credit score, and the relationship you have with your issuer. Sometimes, your issuer might offer a promotional rate or allow their clients some leeway. One thing for sure in this case is that if you don’t ask, you’ll never know.

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Be cautious

Be extremely cautious with using balance transfers, despite how good they might sound to you. Credit card companies don’t just come up with a product for the sake of coming up with it, they’re out to get your money. It’s very easy to get sucked into a new card for the rewards, cashback, along with all the bells and whistles.

It doesn’t matter what it is; you have to make it work in your favour. If you have a plan already, then this could be the tool you’re looking for, but if you don’t, start by building more solid budgeting habits.

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