A credit card balance transfer occurs when a credit card holder opens a new credit card to pay off the old one. The debt and interest is then owed to the new company, who often provides a grace period where a smaller amount of interest is charged on the transferred balance. Finding two, one, or even zero percent interest may be possible. Oftentimes this introductory rate lasts for around six months to a year after the balance transfer takes place. Usually there is no fee for the transfer and anyone with a valid social security number and mailing address can take advantage of the option.
Purposes of Credit Card Balance Transfers
Balance transfers are one way to help card holders pay off credit card debt. Credit cards are a big business today, with many companies making a fortune off finance charges. The average annual percentage rate is about 16% on most credit cards. With that kind of interest, it can be difficult to pay down a credit card, because it is consistently charging interest and adding to the principal.
For a savvy consumer, a credit card balance transfer can be an excellent method of reducing debt. It leaves the person free to pay down the credit card balance without incurring additional interest charges. Using this strategy, a person could potentially open a new account that offers a balance transfer when the old one expires, transfer all of the balance to the new card, and begin a new grace period with low or non-existent finance charges.
While the credit card balance transfer benefits the consumer, it also benefits credit card companies. Another purpose of the balance transfer is to help financial institutions gain new customers. Many institutions offer free transfers and grace periods in order to earn more business and eventually more money.
Things to Consider
Making a balance transfer work is an excellent practice, but diligence is required. When transferring to a new institution, there may be some fine print attached with hidden charges, such as transfer fees, annual fees, and joining fees. Transfer fee amounts are often a percentage of the total balance transferred. Some transfer fees will be capped, usually around $50 or $60 US Dollars (USD), or it may be significantly higher.