Credit card debt continues to grow in the U.S., and as debt accumulates it becomes harder to stop it.
In 2019, the average credit card debt in the U.S. is $5,331, and many Americans struggle to make their full monthly payments. While Americans with more income have higher amounts of credit card debt, lower income Americans have a higher ratio of credit card debt to income. With Americans struggling so mightily to pay off their debts, what are some options for making progress?
One possibility that credit card owners have is doing a balance transfer. Play your cards right, and a balance transfer could help with a sizable chunk of credit card debt. But doing so requires a lot of research and preparation to determine if it is the right move for your specific situation.
So, what is a balance transfer and how do you make one?
What Is a Balance Transfer?
A balance transfer is a process in which you transfer your existing credit card balances and debts to another credit card. The balance transfer card should have a significantly lower interest rate than the initial card, making it easier to pay off what could be a substantial debt for you.
Balance transfer cards may allow you to combine the balances of multiple credit cards, depending on the total balance you're looking to transfer and the credit limit on your new card. For example, if the limit on your balance transfer card is $6,000 and you have one credit card with a $3,000 balance and one with a $2,000 balance, you should be able to successfully transfer both of those balances onto a single card.
It's possible for you to refinance other types of loans with a balance transfer. Student loan debt, for example, continues to hinder millions of Americans financially every year. You could attempt to refinance some of your student loans on a balance transfer card, though you'll need to do quite a bit of math regarding how much of that debt you can put on a credit card and how much you can afford to pay each month.
Two of the most important components of a balance transfer that you'll need to understand before initiating one are how their interest rates and fees work.
Balance Transfer Card APRs
Much of what makes credit card debt so hard to overcome for many people is the annual percentage rate (APR), or the overall interest rate a lender will charge for the credit card balance. The APR for your card, depending on your credit score, may be anywhere from 15%-24%, and that adds up.
What separates a card you're using as a balance transfer from your initial credit card is that often you won't have an APR on it at all - at first. When looking for a card for your balance transfer, look for ones that offer 0% APR. There is a finite period in which you will be able to float your balance interest-free. Twelve months is a common amount of time for this, some are 15 and 18 months, but some lenders are willing to go even longer.
Once that period ends, you will then be paying your balance with a standard APR. You'll know in advance when that point arrives. So when you apply for your balance transfer credit card, you'll know what to plan for, and that you will need to plan your finances around repaying your debt in that amount of time.
There are balance transfer cards that don't have a 0% APR - and if you don't have a great credit score, that may be your lone option. If this is the case, once again make sure you are planning everything and seeing what you can afford. You'll need it to be a smaller APR than your current card has for it to be a feasible way to successfully refinance your debt.
Balance Transfer Fees
Of course, even when you have 0% APR credit card, companies are still going to impose balance transfer fees on the balance you are moving over to the card.
Generally, the balance transfer fee you will incur is in the range of 3-5%. Upon completion of the transfer, the 3-5% of the balance is added in and becomes a part of the payments you are expected to make each month.
Balance Transfer Example
Let's put all of this together into an example of a balance transfer.
Let's say you want to combine $7,000 in credit card balances onto one balance transfer card. You apply for a card and are approved, with 0% APR on the balance for 18 months before it becomes a 15% APR. This deal also involves a 3% fee.
First, we have to figure out the fee. Three percent of $7,000 is 7000 x .03, or $210. So your total balance you're looking to pay off is $7,210.
You get 18 months without any APR on this balance. Dividing $7,210 by 18 gives us 400.56, which means if you paid $401 in each of those 18 months, the balances would be paid off. If you can't make those payments during that time, the remaining balance will be subject to the APR.
In another example, imagine it is a balance of $3,000 with a 0% APR for 12 months with a 5% fee. The initial balance and the fee add up to a total of $3,150. Divided by 12, you would need to pay $262.50 every month to successfully pay off the balance before being subject to an APR.
These are very clean examples, however. In real life, you may have a larger amount of credit card debt you're trying to refinance, and you may not have the credit score necessary to get the time frame of 0% APR that you would prefer. And even if these examples apply to you, there's no guarantee you will have the money necessary to make those monthly payments. It's not always easy to set aside $400 for credit cards every month.
You should lay out the math in advance of actually getting a balance transfer card to see what you can reasonably afford on a monthly basis in the immediate future.
How to Initiate a Balance Transfer
That, technically, would be the first step of transferring your balance: figuring out what you can actually handle. Making sure you can even do a balance transfer is the most important part of the process.
Once you've established that this is a realistic solution for you, and once you know what you can reasonably do, you need to seek out banks and lenders who are offering balance transfer cards at your standards. If you find a card with the right APR, time frame, fees and credit limit for you, most lenders let you apply online.
Should you get approved for the card, you'll need to contact the credit card company to provide them with the necessary information for a transfer, i.e. the amount you wish to transfer and access to the previous card(s). Give it some time, as this may end up being a more timely process than you would prefer, but once you receive confirmation that the transfer has gone through, you now have your card set up.
When Is a Balance Transfer a Good Idea?
Clearly, a balance transfer is a big step that you should take lightly. When is it something that might be worth considering?
If consolidating your credit card payments is a priority for you, a balance transfer may be a good option for you. Turning multiple credit card balances into one, if you can do it, means one less bill you have to worry about at the end of the month and just a little bit less stress.
A balance transfer could also be particularly helpful if interest is what is holding down your debt above all else. Interest payments can keep people in debt far longer than they anticipated when they first take out a loan or apply for a credit card. If you are able to get a balance transfer card with an introductory 0% APR period, you get the opportunity to only pay your balance, potentially saving you hundreds if not thousands of dollars in a year.
When Should You Not Transfer Your Balance?
Getting a year or more of a credit card balance with 0% APR may seem too good to be true. And in some ways it can be. They won't give that to just anyone. If your credit score is too low, you may not get approved for a 0% APR balance transfer card. You may still qualify for a balance transfer card with an APR, but if it isn't notably smaller than your existing APR it may not be worth it. Take a look at your credit score when considering a balance transfer, because depending on where it's at, you may want to look at other options.
A balance transfer can also impact your credit score. It shouldn't hurt it for an extended period, but it will affect it. Opening a new credit card means a new line of credit, meaning a more recent line of credit than you previously had. And if you follow up the balance transfer with canceling your old cards, you end up with a much shorter credit history. These can put a small dent in your FICO score, and while that's certainly fixable it is worth looking at if you need your credit score to be high for other purchases.
Then again, if you're looking to make big life purchases, a balance transfer probably isn't a good idea, period. Paying off your credit card balance is about repaying debts and saving money, and trying to do that while adding debt is going to leave you right where you started. Take stock of all your finances before determining if this is the right next step.