September 9, 2024

What is a Balance Transfer and How Does it Work?

How-do-Credit-Card-Balance-Transfers-Work

Transferring balances from one credit card to another is one way of reducing debt and optimizing interest savings. And you’ve probably gotten a letter (or 50) in the mail offering you a balance transfer deal. But how do credit card balance transfers work?

At its core, a balance transfer allows you to transfer a credit card balance to another card, typically to take advantage of a lower interest rate. It’s a financial move that can be especially beneficial if you want to save on interest payments and streamline your debt management.

As we delve deeper into the mechanics of balance transfers, we’ll also explore how platforms like EarnIn are changing the way we approach our finances and credit cards altogether.

What is a credit card balance transfer?

In the world of credit, a balance transfer refers to the process of moving an outstanding balance from one card to another.

The primary goal is to save money on interest. Transfers allow you to capitalize on the receiving card’s lower annual percentage rate (APR), especially during promotional periods where interest rates can be significantly reduced or even zero.

You could save hundreds or even thousands of dollars by shifting the balance to a card with a lower rate. It’s a strategic move that can provide financial relief, especially for those grappling with high-interest debt. Knowing how to do a balance transfer is crucial for maximizing these benefits.

The concept sounds straightforward, but there are nuances to consider. Not all balance transfers are created equal, and understanding the terms is key. Additionally, other tools, like EarnIn, offer complementary solutions that can empower you on your financial journey.

How does a balance transfer work?

Here are the basic steps to execute a balance transfer:

1. Pick the right card: Research a credit card offering favorable balance transfer terms. Look for cards with low or 0% introductory rates and consider any balance transfer fees.

2. Apply for the card: Once you’ve chosen a card, apply online or by phone. During the application, you’ll typically be asked if you want to complete a balance transfer. Provide the details of the debts you wish to transfer, including account numbers and amounts.

3. Wait for approval: The new card issuer will review your application. They’ll process the balance transfer upon approval, which can take several days or weeks.

4. Make payments: Once you transfer the balance, you start making payments on the new card. Pay at least the minimum amount due each month (or more, ideally) to take full advantage of the lower interest rate.

5. Monitor both accounts: Keep an eye on your old account to make sure the balance has been fully transferred and you’ve paid any residual interest. Leave the old account open to maintain your credit utilization ratio while avoiding new debt.

How much can you save with a balance transfer?

When it comes to deciding whether a balance transfer is a good idea, think of it this way: The potential savings from a balance transfer can be substantial, especially if you’re paying high interest on an existing credit card balance.

Imagine you have a $5,000 balance on a credit card with an 18% annual interest rate and you only make the minimum payments. It could take years to pay off and cost you thousands in interest.

But if you transfer that balance to a card with a 0% introductory rate for 12 months, you could save more than $700 in interest during that year, assuming you continue to make payments. This doesn’t account for the potential savings after the introductory period ends if the new card’s regular APR is still lower than your original card.

What to consider before completing a balance transfer

Balance transfers can offer significant savings, but you must be aware of the various factors and potential pitfalls:

Balance transfer limits: Most balance transfer cards have a maximum amount you can transfer. Check this limit to make sure it meets your needs.
Fees and savings: Some cards charge a balance transfer fee, typically a percentage of the transferred amount. Calculate whether the savings from the lower APR will outweigh this fee.
Credit score requirements: Not everyone will qualify for cards with the best balance transfer offers. These cards often require a good to excellent credit score.
Affect on credit score: A balance transfer can reduce your credit utilization on one card, but increasing it on another can hurt your credit score. Additionally, applying for a new card requires a hard inquiry, which can temporarily lower your credit score.
Grace period: Many balance transfer offers come with a promotional period where the APR or interest rate is very low or even 0%. Knowing when this grace period ends is essential, as the rate will revert to the card’s standard APR.

Balance transfers can be a strategic move in the big picture of financial management, but they are just one of many tools.

Alternatives to balance transfers

Balance transfers can effectively manage and reduce credit card debt, but they’re not the only option. Here are some alternatives:

Personal loans

These fixed-term loans from banks, credit unions, or online lenders can consolidate multiple credit card debts into a monthly payment, often lowering your interest rate.

Student loans

Some lenders offer student loan refinancing options for those with student loan debt. This can consolidate multiple student loans into one balance, potentially at a lower interest rate. But be cautious, as refinancing federal student loans with a private lender means losing federal benefits.

Maximize Your Finances with EarnIn

EarnIn is your beacon of clarity in a confusing financial landscape, offering innovative tools that transcend tradition. We’re here to help you take control of your pay.

Our Cash Out tool in the EarnIn app lets you access your pay as you work — up to $100 a day and up to $750 every pay period — with no credit checks, no interest, and no mandatory fees. Cash Out helps you overcome financial hurdles like overdraft fees and high-interest payday loans or cash advances, so you can live life at your speed.

Beyond Cash Out, EarnIn’s Balance Shield proactively alerts you to low bank balances, transferring money into your account to avoid overdraft fees before you get your bank statement. And our Credit Monitoring tool lets you to keep a close eye on your credit score at any time, for free.

Download the EarnIn app today and discover money at the speed of you.

Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.

1. EarnIn is a financial technology company, not a bank. Subject to your available earnings, Daily Max and Pay Period Max. EarnIn does not charge interest on Cash Outs. EarnIn does not charge hidden fees for use of its services. Restrictions and/or third party fees may apply. For more info visit earnIn.com/TOS.

2. Calculated on the VantageScore 3.0 model. Your VantageScore 3.0 from Experian® indicates your credit risk level and is not used by all lenders, so don't be surprised if your lender uses a score that’s different from your VantageScore 3.0. Learn more: https://www.experian.com/assets/consumer-information/product-sheets/vantagescore-3.pdf