How Does a Balance Transfer Work?

by Guest Post

A balance transfer credit card can be a tricky proposition, and if you aren’t familiar with the process, it can cost you money. It’s not complicated to transfer a balance from one credit card to another; a 0% balance transfer can even save you much, but there are issues you should be aware of before you make the decision to change credit cards. You need to do your research in order to make the best choice possible for your particular situation. What works for your best friend or your parents might not work as well for you. The following is a list of issues you should consider before going ahead with a 0% balance transfer.

Considerations When Using a Balance Transfer

  • What are your reasons for considering a balance transfer credit card. Is it to consolidate loans, establish more credit, dump a card that is starting to cost you too much money in a ballooning interest rate?
  • Once you’ve established your reason, evaluate your ability to “pay back” the loan – because essentially, the balance transfer of A to another credit card, B, is actually looked at as a cash advance by B. Therefore, you want to make sure that repayment of this cash advance is something you can handle so you don’t incur additional fees.
  • How long is the 0% rate going to apply? It depends on each different card company. Some offer three months, six months, even up to a year. Read the fine print and mark well when the interest rates jump – because they will.
  • Not only will the rates jump, they will jump high. Compare credit cards and their offers to determine who has the best rate for the longest amount of time, and whose interest rate rises the least, especially if you cannot pay the balance off before that happens.
  • Although the initial balance transfer credit card may be at 0% interest, new purchases might not be covered. This means if you transfer your debt from one card to another and proceed to charge even more, the new charges are subject to the interest rate. You’ll want to investigate what that is and if it applies to new purchases.
  • If you opt to transfer your balance from one card to another, don’t forget to cancel the old card. It can impact your credit rating to have a few cards with an open balance, plus it can be very tempting to charge on the old card. That defeats the purpose of transferring your balance in the first place, so once the transfer has happened, close out the old card.

The smart thing to do before you decide to participate in a 0% transfer from one credit card to another is to do your research. Compare credit cards and what they offer. It will be obvious quite quickly which ones will help you in your current situation and which ones will not. A little bit of work at this stage will save you not only money, but will also save you from making any expensive mistakes.

This is a guest post from Mike Bains

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krantcents April 26, 2011 - 11:01 am

Good explanation! The message is very clear to give it a lot of thought before you transfer a balance to another card, however I wonder how many people really think it through. The consequence is obvious, you incur the higher costs.

Jenna April 26, 2011 - 11:54 am

Why would someone do a balance transfer?

101 Centavos April 27, 2011 - 6:11 am

Good point on canceling old cards and their impact on credit ratings.

Sunil April 28, 2011 - 7:41 pm

to address some of the questions, many do a balance transfer because they are enticed with a 0% APR for the first X months, and others are enticed with mouth watering benefits (hotel pts, airline miles etc). many do it to buy themselves a longer 0% loan. a relative had a large balance on one 0% card, which he had xferred to another one for another 12 months of 0% interest – back in the hay days of course

Mike Brains May 4, 2011 - 10:12 am

I know people who have actually have used this system and worked for them. The trick is to look at the fine print and not spend beyond your means. It also means more capital if you’re sensible with your spending or want to delay a payment becuase of a holiday or christmas etc.

Michael November 27, 2011 - 1:21 am

How does a balance transfer work?

I assume:
Step 1 – get a card offering to transfer a balance.

Step 2 ?????

Evan November 27, 2011 - 11:12 am

Is this a real comment? Apply for the car and then when they ask if you have a balance to transfer you say yes lol

Michael November 28, 2011 - 11:09 pm

More a question – can you transfer more than the balance? How do they know?
Ie – If my balance is $5k; but want to transfer $10k; can I?

Tina June 15, 2012 - 10:30 am

Question… or 2…..
So I know this is old but, I am considering a balance transfer because 1. I would like a greater limit 2.You’re right those hotel perks, reward points and cash back are enticing. and Lastly 3.Idont like the card I have, it was a secured card, because I was rebuilding, now that I have rebuilt I am getting these offers left and right. And the secured card with Cap One changed their policy and will no loger be reviewed to become a unsecured card with a increased limit so it seems I am stuck with this low limit secured card… So its like a Debit card almost… just that reports to the credit bureaus. With all of that said… I was planning to transfer the balance of 2 cards but keep them open as to not negatively effect my credit with a closed account notated on my report. So I thought keeping it open and just not using it but maybe for very very small purchases here and there to keep the positive reports coming in on my credit report. Does that make since?

Evan June 15, 2012 - 11:09 am

Well the first question I would ask are you sure you’ll get approved? If you are only in a secured card is it possible you won’t get approved…b/c that would be a hit or two on your credit report with nothing gained.

Other than that it makes sense as long as you have the will power to keep the other 2 cards clean.


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