Credit card debt can be crushing, especially with high interest rates making it difficult to pay off your principal balance. If you’re struggling to pay down or pay off your balance, a balance transfer may be a route worth taking.
Why transfer a balance to a new credit card?
Whenever you carry a balance on your credit card for longer than a month, the remaining debt is subject to interest. With credit cards, the annual percentage rate can be as high as the mid-20% and even low-30% percent range. That adds up quickly if you have a higher balance.
Say you make the minimum payment but still owe $1,000 from your previous statement balance. At a rate of 25% APR, you’d be charged just over $20 in interest. If you only make minimum or lower payments month to month, you’ll quickly get to a point where you’re barely covering the rolling interest, never mind putting a dent in the balance.
As NerdWallet Assigning Editor Claire Tsosie explains, transferring your balance to a new credit card can save you money and make it easier to pay off your balance. The concept is to find a credit card with a lower introductory APR offer and, preferably, little or no fees for balance transfers. By doing this, you can make payments over a pre-determined period without fear of accumulating interest.
Once the introductory term has finished, the remaining balance will be subject to interest at the new card’s APR. To maximize the effectiveness of a balance transfer, your goal should be to pay it off in full before that term concludes.
How does a balance transfer work?
Transferring a balance to a new credit card is a fairly straightforward process. Tsosie notes you’ll want to first find a credit card that offers a low introductory APR.
Balance transfer fees typically cost between 3% and 5% of the balance. This is a one-time charge and will in many cases be cheaper than paying monthly interest with your current credit card.
It’s crucial that you pay attention to details during this part of the process. Tsosie points out some credit cards that offer a low introductory APR only extend that promotion to purchases, so you will want to be certain that the promo applies to balance transfers as well.
You will likely also have to switch to a new credit card issuer as same-issuer balance transfers are not common. Another consideration is the credit limit on your new card. LaToya Irby, a contributor at The Balance, points out
you will only be able to transfer a portion of your balance if it exceeds your new card’s credit limit. Some lenders, Irby notes, may also cap how much you are allowed to transfer.
Once you’ve found a credit card that meets your criteria, you simply apply for it. As is the case with applying for any line of credit or loan, having a higher credit score drastically approves your chances of approval.
Upon approval, you’ll need to contact the credit card issuer to begin the balance transfer process. While the process may begin immediately depending on the issuer, it can take weeks for the transfer to complete. Irby recommends checking your account statement regularly and making payments as required until the balance shows $0.
If used properly, a balance transfer can help save you a sizable sum of money and make it easier to pay off your credit card. With a fresh slate, you can begin establishing better spending habits, improve your credit score, and set yourself up to build your personal savings.