How to do a Balance Transfer

What is a balance transfer?

How to Transfer a Credit Card BalanceA balance transfer is a common method for DIY debt relief. Basically, you transfer your credit card debt onto a balance transfer credit card that offers a 0% APR for a limited time, typically between 6 to 18 months. This means you can pay off your debt faster without high interest rates slowing you down.

Weighing your options

Since you’re searching for methods of debt relief, you likely already know that a balance transfer isn’t your only option. Before you start the process, examine other choices for debt relief, such as debt management programs, debt settlement, and debt consolidation loans.

If you’re leaning toward doing a balance transfer, ask yourself these questions before you begin:

  1. Is the balance I want to transfer less than $5,000?
  2. Is my credit either good or excellent?
  3. Can I afford to pay off the full transfer amount by the end of the 0% APR period?

When you can answer all of these questions with a “yes,” a balance transfer may be your best option. With more than $5,000 of credit card debt, a debt management program could be better. If you have bad credit, settlement could be a reasonable choice. It all depends on your personal situation and what you can afford to pay.

How to do a balance transfer: Step-by-step guide

Step 1: Assess your debt.

How much debt do you want to transfer? Assess your debt and budget to get all of your personal finances organized. Incorporating your monthly debt payments into your budget is especially important, since the last thing you want to do when paying off a balance transfer card is rack up more debt on other credit cards.

Use Consolidated Credit’s Debt Worksheet to see where you stand » 

Step 2: Choose a balance transfer card and apply.

Once you have all your financial ducks in a row and you know how much of your balance you want to put on the balance transfer card, it’s time to choose a card to apply for. Do some research on the best cards. Find one that emphasizes a long promotional period with 0% APR. The longer this period, the longer you have to pay down your debt without any added interest.

NOTE: Make sure can transfer all of your existing balances to the new card. Some credit furnishers don’t allow transfers to their own balance transfer cards.

Step 3: Transfer your balances to the new card.

Once you choose your card and your application is accepted, you can initiate the transfer of your balances. This process depends on the credit card issuer you get the card from.

NOTE: Most companies charge a fee for transferring balances. This is usually 3 to 5% of the total balance with a minimum of between $5 and $10

[1]. Make sure to factor this into your budget analysis.

Step 4: Pay off your debt on the balance transfer card.

The last step of this process is to pay off your debt! Keep up with your monthly payments, which should be built into your regular budget. To prevent yourself from falling behind, consider setting up automatic payment plan.

5 key tips for transferring balances successfully to consolidate debt

A balance transfer credit card is one tool you can use to consolidate debt in the right circumstances. However, be careful! If you use a balance transfer in the wrong financial circumstances, you can actually make the challenges you face with debt worse instead of better. With that in mind, make sure that you understand these five points before you decide to apply for a balance transfer credit card.

If you still have questions or you need help deciding which option for consolidation is right for you, call Consolidated Credit today at 1-888-294-3130 to request a free and confidential debt analysis from a certified credit counselor.

Tip No. 1: Always aim for 0% APR

One of the main goals for debt consolidation is to reduce the interest rate applied to your debt as much as possible. This allows you to pay off the debt you owe (principal), rather than most of your payments going to pay off accrued monthly interest charges.

The big advantage of using a balance transfer credit card for debt consolidation is that with a good credit score you can qualify for 0% APR for an introductory period. This means 100% of every payment you make goes to eliminating the principal, so you can eliminate the debt quickly.

If you can’t qualify for 0% APR because you don’t have strong enough credit, then you will usually be better off using a different option for consolidation.

Tip No. 2: The longer the introductory period, the better

Your goal with a balance transfer consolidation strategy is to eliminate the debt in full before the introductory period expires. This means you want to aim for the longest introductory period possible, so you have more months to eliminate the debt before the standard interest rate goes into effect.

Keep in mind that the shorter your introductory period, the higher the payments will have to be to accomplish Tip No. 3 below!

Tip No. 3: Divide the debt by the number of months at 0% APR

As mentioned above, your goal when you consolidate with a balance transfer is to pay off all of the debt within the introductory period before the 0% APR period expires. Once it does, the interest rate can jump to 20% or higher. In other words, you effectively lose the benefit of the balance transfer once the standard interest rate applies.

With that in mind, if you have $5,000 in debt to pay off in an 18-month introductory period, your payments should be $278 per month – regardless of what the minimum payment requirement says. This is why balance transfers only have limited viability as a consolidation solution. If you have too much debt, such as $25,000, your monthly payments would have to be $1,389 to pay off your debt before the introductory period expires. In most cases, that would be too high for your budget, so you’d be better off with a different debt solution.

Tip No. 4:  Be careful with balance transfer fees

Almost all balance transfer cards have a fee applied for each balance you transfer. Depending on which balance transfer credit card you choose, this can range from 3 to 5% of each balance transferred. Minimum fees are usually between $5 and $10. This means fees have the potential to significantly increase the amount of debt you need to pay off.

If you have a card with a transfer fee of 3% then the fees for that $5,000 balance would be around $150.  That means your monthly payments would actually need to be around $286 instead of $278 to pay off the balance in-full within the 18-month 0% APR promotional rate.

Tip No. 5: Stop spending on your other credit cards

One of the biggest mistakes people make in do-it-yourself debt consolidation is that they fail to stop spending on credit after they’ve consolidated. When you transfer the balances to the new card, your other accounts will be sitting at zero balances. It can be really tempting to pull out the plastic to make purchase you want or to earn rewards again.

However, you need to be committed to eliminating your debt rather than adding to it. You should stop charging on your high interest credit cards until the consolidated debt has been eliminated. Otherwise, you can end up making your situation with debt worse instead of better.

Written by :
Meghan Alard [email protected] Financial Literacy Specialist