Why Should I Choose a Balance Transfer?

13 Jul 2020

Are you worried about the high-interest rate on your credit card? 

Is it becoming difficult to pay off your credit card balance? 

There is no reason to worry if you have made your decision in a hurry. There is a perfect solution for unmanageable interest rates. Balance transfers allow you to move your debt to a new card with a much lower interest rate. This way, you can save money and focus on paying off the principal amount on your card. 

Suppose, you have a $4,000 balance on a credit card with a 15% interest rate. A possible repayment method is paying $230 every month for 20 months. However, if you utilize a balance transfer and move your debt to a new card with a 0% interest rate and a 3% transfer fee, you can pay off the debt in roughly 18 months (including the $120 transfer fee). Not only would you be saving time but you’d also be saving $480 that would’ve gone to interest. 

Balance Transfer – The Concept

Many people find themselves in a situation where they have accumulated a large balance on a high-APR credit card. In times like that, it is a great idea to consider a balance transfer. This is a simple concept: you apply for a new card with a lower interest rate, and then move your balance to it from your old card. This allows you to pay off your old credit card debts through a new card at a much lower interest rate. 
This easily seems like the best option when available, but it is important first to understand if the balance transfer is truly advantageous for you. There are a few things to consider aside from comprehending basic eligibility. 

The Limitations of a Balance Transfer

Many credit card companies will offer a very attractive interest rate, but it is only effective for a predetermined period. Commonly, that period lasts 6 to 18 months, after which the interest rate will increase. So it is key that you’re able to pay off your balance within that period. 

Another thing to consider is the balance transfer fee. Most companies will make the fee 3% of your total balance, but during special promotions, you can be lucky enough to have it waived. 

And finally, there’s a limit to how much you can transfer. So the first step is to check that your balance is under that limit so you can transfer to the new card. 

If all these conditions are in your favor then, without a doubt, a balance transfer is a good decision. 

For example, 

How Does a Balance Transfer Affect Credit Score?

Clearing debt will always benefit your credit score, and a balance transfer is a very effective way of doing so. The amounts you owe account for 30% of your FICO credit score, and the dollar amount of your debt is factored in. Another factor is your credit utilization ratio or the percentage of your available credit that you’re using. Keeping this below, 30% is ideal. 

Suppose you have the following balances on cards:

Card A: $1,000 balance with a $4,000 limit

Card B: $2,000 balance with a $5,000 limit 

Currently, your total credit utilization ratio is 33% ($3,000 / $9,000), which is above 30%, and therefore, significantly bringing down your credit score. Now if you choose to transfer your entire balance to a card with a $6,000 limit, you can bring this ratio down. 

Card A: $0 balance with a $4,000 limit

Card B: $0 balance with a $5,000 limit 

Card C: $3,000 balance with a $6,000 limit

Your ratio would come down to 20% since your balance is spread across three cards. So aside from allowing you to pay off your debt with 0% interest, a balance transfer can improve your credit score. This makes it easier to take out loans and receive other financial benefits in the future. 

Why Use a Balance Transfer Instead of a Loan?

If the balance on your credit card is low, and you know you can pay it off within the 0% interest rate period of the new card, then a balance transfer is the best choice. This is because loans often have a much higher interest rate. It doesn’t make sense to take out a loan with a 5%-6% interest rate when you can pay off your debt at a 0% interest rate. But you need to be sure of your repayment time. 

Bottom Line

A balance transfer is a very suitable option for those racking up debt on a credit card, personal loan, or other financial product. However, the balance needs to be manageable within a specific time frame, and the offer must have a minimal transfer fee for this to be a practical solution. Unlike taking out a loan, a balance transfer allows you to pay off debt with a low API rate, making it the best choice. Most banks and lenders offer a balance transfer credit card. Chase Bank, American Express, Citi Bank, Wells Fargo, and Capital One are few examples. It’s just a matter of finding the one that meets your needs the best. 

Below we have listed a few popular balance transfer options with no transfer fee. 

  1. Chase Slate credit card

  2. Barclaycard Ring Mastercard

  3. NASA Federal Credit Union Visa 

  4. Alliant Credit Union Visa Platinum Rewards