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Balance transfer is a concept you need to understand. Here’s what it means.
What is a balance transfer?
A balance transfer is moving a debt balance from one account to another account. The most common type of balance transfer is shifting debt from one credit card to another credit card. Most often, people transfer a balance in order to take advantage of a lower interest rate.
In addition to credit card debt, balance transfers may involve shifting or consolidating student loans, mortgage debt, medical bills, or car loans or other installment loans.
Many credit card issuers offer balance transfer checks to facilitate balance transfers. Credit card issuers charge a fee for balance transfers, typically 3 to 5 percent of the transferred amount.
Balance transfers make the most sense when the transfer is from an account with a higher rate of interest to one with a lower interest rate. As of early 2017, the average interest paid on a credit card was 15.50 percent.
A balance transfer can be a good idea when you have a firm plan in place for eliminating the debt. In addition, consolidating debt under one monthly payment helps manage the debt load more effectively and aid in forming a plan to pay off the balance.
Balance transfers can be a bad move if you fail to read the fine print. Most low-interest or zero-percent-interest credit cards only offer such favorable rates for an introductory period, after which the rate is much higher. Read the fine print of the transfer offer and understand what the interest rate will be once the introductory period ends. It could be higher than the interest paid on the previous line of credit.
Balance transfer example
If you have credit card debt of $5,000 and want to pay it off in 18 months, paying 15.50 percent interest can make it tough to get in front of. If you were to transfer that $5,000 to a card with zero percent financing for 18 months, you know that after 18 months of making $278 payments the debt will be repaid in full.
Looking for the lowest balance transfer rate out there? Check out Bankrate’s list of the best balance transfer cards.
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