What is a balance transfer?

Maryalene Laponsie
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Maryalene Laponsie
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What is a balance transfer?

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A balance transfer is a feature of some credit cards that allows you to move a balance from one credit card to another. This is commonly done to take advantage of a lower interest rate, but people may also transfer balances to consolidate debt and make it easier to manage payments. If you have a high-interest credit card, it may be time to consider a balance transfer credit card.

Keep reading for more about how balance transfers work, how much they cost, and whether or not transferring a balance will affect your credit score.

How do balance transfers work?

Many credit card companies have made it simple to transfer a credit card balance, and balance transfers can be made to an existing card or a new account. Some cards even offer an introductory 0% APR on transferred balances for a year or more.

By transferring a balance to a low or zero interest card, you may reduce your monthly payments. Plus, more of your monthly payment will go toward the principal which can help you get out of debt faster.

You may be wondering: will a balance transfer affect my credit score? It could, and we’ll talk about that in a moment, but first, we need to have a word about fees.

What is a balance transfer fee?

While balance transfer credit cards can save money on interest, be aware that they often charge a one-time fee to make the transfer. This fee is generally a percentage and commonly ranges from 3-5% of the amount transferred, although there are some zero-fee balance transfer cards available for people with excellent credit.

Review each balance transfer credit card offer carefully to determine what, if any, balance transfer fee applies and whether paying that fee will save you money in the long run.

CardRatings.com has developed several credit card calculators to help you determine whether the fee is worth the amount you’ll save in interest. With these tools, you can see what your monthly payment would be if you want to pay off your existing credit card debt within a specified time frame or how much you could save in interest by taking advantage of a balance transfer credit card offer.

Enter your existing credit card balance that will be transferred, your current interest rate, the interest rate on the card to which you want to transfer the balance and then take a look at how much you could save. There are a number of variables you can adjust within the calculators, so take some time to crunch the numbers and determine the best debt payoff option for you.

Now, on to that pressing question: do balance transfers affect your credit score?

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    Do balance transfers hurt credit score?

    They could cause a dip in your score if you are opening a new account. Applying for a new card will result in an inquiry on your credit report. Each inquiry can drop your score temporarily by a few points. Plus, if you continue to use your old card, you may actually increase the amount of debt you owe, which can also hurt your credit score.

    You should also think twice before closing an old account after transferring a balance. The age of your accounts factors into your credit score, and closing an older account could have a negative effect.

    On the other hand, does a balance transfer help your credit score? It could if it helps you pay down debt. According to FICO, which offers some of the most widely used credit scores, the amount of your debt accounts for 30% of your score. The lower your debt, the higher your score.

    With the best balance transfer cards, you won’t be paying any interest. Barring any other fees, 100% of your payments will go toward paying down your principal, and that can help boost your score.

    Bottom line: a balance transfer can help your credit score, but only if you are committed to making timely payments and avoiding future debt.

    Why would someone consider a balance transfer?

    There are several reasons why someone would consider a balance transfer. They include the following:

    • Consolidate debt
    • Reduce monthly payments
    • Lower interest rates
    • Pay off debt faster

    Regardless of why you are transferring a balance, consider how you plan to use the card going forward. Will you simply be making payments on the existing balance, or do you expect to use the card for new purchases?

    If you will be spending on your new card, consider a balance transfer credit card that offers a welcome bonus to new cardholders in addition to a 0% APR period. If you plan to spend on your new card, these sign-on offers can offset any balance transfer fee you might pay.

    Take the CardName, for example. It charges a 3% balance transfer fee, but it also rewards new cardholders who spend at least $1,000 on eligible purchases in the first 90 days of opening an account with 20,000 points. This bonus could offset (or help to offset) the fee you’d pay to make a balance transfer to the card.

    Ready to get started? Check out the best balance transfer credit cards to find accounts offering 0% APR, welcome bonuses and other perks to new customers.

    Maryalene Laponsie
    Cardratings Contributor

    Maryalene is a freelance contributor to CardRatings.com and specializes in personal finance topics such as credit cards, budgeting, saving and investing. She has written professionally for nearly 25 years and is a regular contributor to U.S. News & World Report, Money Talks News,...Read more

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