How Does a Credit Card Balance Transfer Work?

If you find yourself with significant credit card debt, you may be dreaming about celebrating the day you finally pay it all off. There is a certain freedom that comes with being debt-free, and paying off that credit card will be a major milestone for you. In the meantime, you've probably done some research and come across a balance transfer option. So what is a balance transfer credit card? How do they really work? Is it a worthwhile option to look into? It’s all about transferring a high-interest credit card balance to a new, low-interest card, and it has the potential to save you a lot of money in the long run.

As you prepare to embark on your journey of paying off your credit card and you’re wondering how to transfer a credit card balance, take some time to consider these five steps to make the most of your balance transfer.

Educate Yourself on Your Debt

A balance transfer is most helpful for high-interest debt. Because of this, it’s important to understand how much you owe in total. Make a list of all your credit card accounts and outstanding loans, adding the annual percentage rate (APR) for each. We know this can be a daunting and intimidating task, but getting everything recorded and looking at it all at once is the perfect way to get a grasp on how much debt you have and the kinds of debt you have, and is the first step in making a plan to tackle it all.

The next thing you’ll want to do is to get your latest credit score. Many financial institutions and credit card companies provide a FICO® Score snapshot with your account information. Another way to access your full credit report for free is to visit sites like annualcreditreport.com, Credit Karma, or Equifax. There are plenty of resources available to help you get the information you need about your credit score, so take advantage of them!

Do Your Research

Once you’ve done all of the necessary research and you’ve armed yourself with info, start searching for balance transfer deals and compare the different features. A great plan of attack is to do your research online and keep all the details in a spreadsheet so that once you’ve finished your studying, it’s easy to compare all of your different options. Here are a few things to look for in your search:

• APR—APR stands for Annual Percentage Rate, and it’s a broad measure of the cost of borrowing money. Make note of the promotional interest rate as well as the APR once the promotional period is over to see if it works for you.
• Transfer fee—Some financial institutions charge a fee to make a balance transfer. This is usually a percentage of the total amount transferred—typically around 3–5%. Ideally, you will be looking for a card with no fee.
• Length of promotional APR offer—Credit card companies will often offer a promotional APR, which is a reduced interest rate for a certain period of time. Promotional rates usually range from 6–24 months. This can be a great offer to take advantage of, you will just want to stay aware of when your rate will increase.
• Which charges are subject to the low promotional rate—Some cards will honor the low rate on all new purchases, as well as your transferred balance, during the promotional period. Others charge a higher rate on any new charges, so you’ll want to do your research to see what applies and what doesn’t.
• Annual fee—An annual fee is a yearly charge for the use of your credit card. Confirm whether your new credit card has an annual fee.

Mountain America advises to research and understand how a transfer will affect your credit. "A balance transfer will not affect your credit standing directly, but can change your financial profile which will affect your credit score. First, a balance transfer can alter your credit utilization ratio. Your overall utilization will fall, as long as the account you're transferring your balance from stays open. Second, be aware that your credit score takes a temporary dip for about 3-6 months after opening a new credit card account. Distance your balance transfer away from other major financial events, such as applying for a loan.”

Compare, Choose and Apply

You’ve found the option that works best for you- awesome! Most balance transfer cards allow you to apply online and get an answer in minutes. Others require 24–48 hours before notifying you. Now that you know which direction you’re going to go, find out what the application process is for the option you’ve chosen and get the process started on your balance transfer credit card.

Follow the Balance Transfer Instructions

Once you’ve been approved, it’s time to review the transfer process. Gather all of the account information for the card you are transferring the balance from and the exact amount you want to transfer to ensure you have all of your ducks in a row. Follow the steps and you’re done! You’ll also want to be sure to check with your old credit card company to ensure the previous balance has been paid and that everything has been taken care of.

Make a Payoff Plan

Make the most of your low interest rate by working this debt into your budget for a full payoff before the promotional period ends. You’ll want to make it a point to take full advantage of that lower interest rate while you can, so take a hard look at where you can cut back in other areas to get this card paid off as quickly as possible. Check out your options for a credit card balance transfer today!