High-interest credit card debt can weigh the average working family’s monthly budget down. The inability to cancel out credit card balances is only compounded by escalating interest charges. In an effort to get out from under the stress of unmanageable credit card debt, people are looking for practical solutions.
One of the effective financial strategies involves transferring balances to lending options with lower interest rates. A common solution is a balance transfer credit card. If you're wondering “What is a balance transfer credit card, and how does it work?” you're not alone. Given that U.S. credit card debt recently reached a record high of $986 billion, up 20 percent from 2022, understanding how a balance transfer credit card can help will prove invaluable in terms of debt reduction and financial freedom.
What is a Balance Transfer Credit Card
Balance transfer credit cards are any type of credit card that allow users to move higher interest debt onto a credit card with lower interest. When people transfer their balances to lower interest credit cards, it can potentially save them a lot of money when done strategically.
In many cases, people apply for low-interest credit cards that offer zero-percent introductory offers. These usually last for a variety of months allowing savvy people to pay off the balance within that time limit. When feasible, the balance transfer credit card helps them pay off the total amount without having to also pay interest charges. That can be an enormous saving when selecting the right credit card. With a low rate credit card, rewards credit card, and even student credit card options available for balance transfers, it’s important to keep these factors in mind when trying to select the best card for your needs:
- Fee-free balance transfers
- Zero interest introductory offers
- Low-interest rates after an introductory period
- No annual fees
- Fee-free cash advances
- Emergency credit card replacement
- Optional notifications and alerts
- Redeemable rewards programs
Be sure to read the fine print to ensure your new card will not charge the typical 3-5 percent on balance transfers. That charge alone can upend the strategy of reducing or eliminating the debt altogether.
Who Should Get a Balance Transfer Credit Card?
Now that you understand the basics of balance transfer credit cards, the next step is deciding whether it’s the right solution for you. People who leverage this debt-reduction strategy are often struggling with high balances across multiple credit cards. People usually have car loans, house payments and other bills that leave little of their hard-earned incomes left for leisure spending. But before you run out and apply for yet another credit card, ask yourself the following questions.
- Can I refrain from racking up debt on my old cards after the transfer?
- Will I be able to reduce the number of monthly bills by transferring entire balances?
More than one-third of Americans carry credit card balances from month to month, which increases their indebtedness. When that interest is north of 20 percent, it can have a profound impact on your financial life. If you feel like you’re sinking in financial quicksand, a balance transfer credit card could be the right solution.
What Kinds of Debt Can Be Consolidated (Transferred) Onto a Credit Card
The basic concept behind this revolving line of credit is that qualifying people can move high-interest debt to a lower-interest account. Local lending institutions tend to be quite flexible about what gets consolidated onto the balance transfer credit card. While it's very typical to see high-interest credit card debt consolidated onto a balance transfer credit card, other debt such as automobile loans, student loans, personal loans, and home equity loans can also be combined if they fit within the new credit limit.
It’s important to keep in mind that even the best balance transfer credit cards have some limitations. Most will not allow you to move balances from credit cards from the same issuer. That essentially means you can only move balances from credit cards issued by other financial institutions.
Balance Transfer Credit Card Pros
Like any borrowing option, balance transfer credit cards can be a mix of pros and cons. The one best suited for your situation can help fulfill your short- and long-term financial goals. These are among the most reported benefits of using a balance transfer credit card.
- Zero Interest Period: Using this credit card to transfer balances could result in hundreds of dollars in interest savings. Enjoying months without paying interest is certainly a bonus.
- Financial Simplicity: Borrowers can move multiple balances onto the credit card account. This reduces the number of monthly bills people pay and simplifies the repayment process. Even if you don’t completely pay off all the balances during the zero-interest period, you’re still paying less interest than you were before the transfer.
- Expedited Debt Reduction: Eliminating interest charges for up to six months creates a path to zeroing out those balances. And paying down multiple balances after transferring them also speeds up debt reduction. By using a Personal Debt Consolidation Calculator or a Credit Card Pay Off Calculator and sticking to a budget, you can pinpoint when the balance will be completely paid off and what you can do to pay it off sooner.
- Improved Credit Score: The process of lowering your debt-to-income ratio more quickly has a positive effect on your FICO score. Higher credit scores lead to lower-interest borrowing opportunities. You may even qualify for borrowing options that weren’t previously available.
You may also discover that balance transfer credit card options such as a rewards credit card that offers fee-free balance transfers provide value-added perks such as redeemable rewards points for brand-name merchandise, gift cards and more. Given how much you’d already be saving, the rewards are the frosting on the cake.
Balance Transfer Credit Card Cons
While the right transfer card can deliver almost exponentially positive benefits, the wrong card can worsen your financial health and well-being. By conducting due diligence and speaking to your local experts, you can avoid the following setbacks.
- Math Works Against You: The wrong credit cards come with hidden fees and balance transfer charges. These negatives drive up your cost and reduce your ability to pay off the debt in a timely fashion. Before applying for a new credit card, do the math and make sure it comes out in your favor.
- Rate Hikes: Some financial institutions offer zero-interest introductory offers that are followed by a significant rate hike. People who are enticed to secure these cards are not much better off when the introductory offer ends.
- Credit Score Impact: Applying for multiple balance transfer credit cards can also prove detrimental. Each application results in a credit inquiry that lowers your FICO score and that could prevent you from acquiring the right option. Before pulling the trigger on a suitable product, be sure it checks all the right boxes.
Peach State Can Help You Decide if a Balance Transfer Credit Card is a Good Idea
If you're struggling with high-interest debt, we can help you decide whether a low rate credit card, rewards credit card, or student credit card is the right tool to help you consolidate your credit card balances, save money, and get your finances back on track.
Apply online for your balance transfer credit card today, or contact us if you would like help deciding which credit card option is right for you.
Now that you have learned "What is a balance transfer credit card," the next step is finding the right card. Review our "The Best Credit Cards Always Offer These Hidden Benefits" complete guide to help you find the card that fits your lifestyle!