What Is A Balance Transfer Credit Card?

Credit card debt can sneak up on anyone, and maybe it’s already snuck up on you. You might be scared of what this debt can mean for your finances, and want to know how you could get out from under it. If you’re considering different ways to get yourself out of debt, you may have come across something called a “balance transfer” in your research.

Want to know more? This article will take you through how a balance transfer works, and how it can help you consolidate your credit card debt.

Much like it sounds, a balance transfer is the process of taking the balance of one or more credit card(s) and transferring it to a brand new credit card as a form of debt consolidation. Your old card will have a zero balance, and your new card will carry that debt until you can fully pay it off.

Some lenders will offer a 0% APR introductory period for your new balance transfer card, usually lasting 12 – 18 months, during which you’ll owe zero interest on your monthly payments. It could make sense to avoid a year's worth of high interest credit card payments by transferring to a 0% balance transfer card, if you are certain you can pay it off within the introductory APR period.

Once you find a card and provider that’ll work best for you, setting up your balance transfer can be done one of the following ways:

1. Follow the instructions online on your card provider’s website or mobile app.
2. Call the number printed on the card to speak to an agent who will take the necessary steps to transfer the current balance up to your new credit limit.

While the transactions themselves can be fairly quick, you may have to wait until you see your balance disappear from one account and appear in the new one. In the meantime, you'll have to pay at least your minimum amount due on time.

Credit cards have become important financial tools in the modern age, and can be useful for building credit. At the end of the day, though, credit cards are also a form of business, which companies stand to profit from. You may then wonder why card providers would offer 0% balance transfer cards at all.

A 0% introductory interest offer is an excellent example of a loss leader. Think of how some grocery stores offer below average prices on certain items. They may be losing money on those items, but making more money overall because they can charge a little more on the other items you'll buy once you're in the store.

Credit card companies know they'll make money from swipe fees at the points of purchase, balance transfer fees and, later, with interest rates that may be much higher than your original cards charged.

Credit card companies are looking at their long-term business model. If you hold onto a credit card over decades, the loss they took with that "free" first year is a small price to pay for your continued business.

Of course, even that first year isn't free. You'll find that the 0% interest does not mean $0 in fees.

If you think a balance transfer credit card is the right solution for you, these are some things to watch out for:

Balance Transfer Fees

What is a balance transfer fee? Let's say you owe $7,000 and you find a balance transfer credit card with an introductory offer of 0% interest. You may think you can transfer the balance from the old card to the new and then pay it off without incurring any charges. That won’t necessarily be true, though.

The first thing you'll have to do is pay a hefty balance transfer fee, usually between 3 – 5% of the transferred balance, or a flat rate of $5 – $10, whichever is greater. Your $7,000 transfer may cost you between $210 – $350. If you pay that with the new card, you may immediately start paying interest on it.

Annual Fees

Another thing to look for is whether the card charges an annual fee. If it does, know that – as in the case of the balance transfer fee – it will be charged to your card and then will accumulate interest charges as well. Annual fees are less common with the best credit cards, but if your credit is shaky, you might not be eligible for those.

Introductory Period Length

Most 0% introductory periods last for 12 months. Some cards offer a longer introductory period, usually 15 months or 18 months, but these are usually reserved for those with excellent credit.

Let's say you plan to pay off your balance during the introductory period, without incurring any new charges. To pay off that $7,350 balance and avoid all interest, you'll have to make monthly payments as follows:

Before you go this route, consider whether the reason you got into debt in the first place was because your expenses exceeded your income. What will happen when you try to put an extra $400 – $600 into paying down your credit card debt?

If you fail to pay off your balance during the introductory period, you'll have to start paying your new card's APR.

Annual Percentage Rate

Your annual percentage rate, or APR, is the true cost of the credit, taking into account interest rates, fees and any other charges. Knowing the APR allows you to compare offers on a clearer basis.

Even when interest rates are low, credit card APRs tend to start at around 13.99%. That rate is reserved for those with excellent credit. In contrast, the minimum APR for a Rocket Loans^SM personal loan for debt consolidation may be lower than the credit card rate for those with excellent credit.

Choosing to go with a balance transfer option can depend on the nature of your debt. Consider the following two scenarios:

Your Debt Is A One-Off

A balance transfer can be an easy way to borrow money on a short-term basis, or as long as the introductory period lasts. If you've encountered an unexpected budget-breaking expense that's spiked your balance – say, for example, an emergency auto repair – and you've already figured out how you'll repay it, there's no reason not to take advantage of the 0% APR offer.

Your Debt Has Become A Way Of Life

In contrast, if your balance is steadily increasing because you're relying on credit cards to fill income-to-expense gaps in your budget and you're juggling multiple loans or balance transfers, you may be heading toward financial disaster.

Additionally, when you've worn out your ability to get more balance transfer credit cards, your new cards' less attractive permanent rates can begin accelerating your debt levels even higher.

A quick way to see if your debt is out of control is to check your debt-to-income ratio, or DTI. To find this value, add up all your monthly payments, including rent or mortgage, then divide the total by your gross monthly income. If your DTI is less than 36%, you may be in good shape. If it's over 36% but below 45%, you should start thinking about reducing your debts. If it's over 45%, you should start doing so urgently.

There is an alternative to the balance transfer cards in the form of personal loans. Consider a debt consolidation loan to help you solve your financial pinch.

What Are Debt Consolidation Loans?

Debt consolidation loans are a type of personal loan that allow you to transfer your credit card debt to a personal loan. This means your monthly payments will not change from month to month, and you will be paying simple interest instead of compound interest. With a debt consolidation loan, you'll only ever pay interest on your principal.

How Do The Monthly Costs Of A Debt Consolidation Loan Compare To Balance Transfers?

A debt consolidation loan gives you the opportunity to choose the length of your loan term, instead of going by the credit card company’s introductory period. If you have $7,000 in debt, you can choose your monthly payment accordingly:

You can see that choosing your own term can have a major impact on your ability to put together a sustainable budget.

Getting A Personal Loan

Applying for a personal loan requires that you have a good or excellent credit score, and a healthy DTI. If you have both, compare different lenders and choose the one who offers the best rates and terms before submitting a full application. If approved, you could see your money arrive in your account in 1 – 7 business days, or that very day with same-day financing, like Rocket Loans offers.*

There are numerous benefits to using a personal loan for debt consolidation. Let’s take a look at some of them below.

Structure And Debt Discipline

A personal loan is an installment loan. This means that every month you will pay the same amount – and that payment represents the simple interest you are being charged and some of your principal.

With credit card debt, your monthly minimum payment is interest only, and the interest is compounded every day and added to the principal, so that the next day's interest charge can be larger than the day before. If you can only make the minimum payment from month to month, you may have difficulty getting rid of the principal amount of your debt.

Cost Of Debt

Let's say you carry the average credit card debt of $7,000 for 5 years. Let's also assume you have excellent credit because you always make those minimum payments, but never much above that to chip away at the principal. At the end of those 5 years, at an interest rate of 14% on your credit card, you will have paid total interest of $7,094.38 and still have a $7,000 principal.

If you had taken out a 5-year loan at 7% interest, you could have paid $1,316.50 and, at the end, potentially had a zero balance.

Rebuild Credit

Regular and on-time payments can both go a long way toward improving your credit.

A debt consolidation loan, however, won't help you in the long term unless you change your spending habits and begin to stick to a monthly budget. If you're having trouble seeing your way to a responsible spending plan, consider asking a financially responsible friend or family member for help, or seek out the help of a credit counseling service.

Knowing your options if you find yourself in problematic credit card debt is important. A balance transfer could seem like a viable solution if you believe you can repay your whole balance within an introductory period, and if you can afford the accompanying fees. Otherwise, you have other options you can consider, such as a personal loan. In the end, you’ll know what’s best for you and your finances.

Want to see what rates and terms you could qualify for with a personal loan? Apply online to see your offers with Rocket Loans today.

*Same day funding is available for clients completing the loan process and signing the Promissory Note by 1:00 p.m. ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same day funding, but results may vary, and your bank may have rules that limit our ability to credit your account. We are not responsible for delays that may occur due to an incorrect routing number, an incorrect account number or errors of your financial institution.