What Is A Balance Transfer?
A balance transfer is a process that lets you move an outstanding debt balance from one account to another.
A balance transfer is a credit card transaction in which a cardholder transfers debt balance from one account to another. Various kinds of debt can be moved between accounts, including student loans, mortgages, car loans. Though the debtor must still pay the debt, in most cases, the transfer can help reduce the amount of interest the debtor will pay if the new account offers a lower interest rate.
A balance transfer allows people to move their debts to a lower interest rate credit card. Some balance transfer cards have a promotional offer of a 0% interest rate on the transferred balance. This is often for a limited period for first-time users. That could allow a debtor to go several weeks without accruing interest instead of paying only the debt balance.
When done correctly, a balance transfer can help save money on interest charges. This can allow you to pay off a loan faster. You must know how the process works and what the terms and conditions of your credit card company say before initiating the process, as sometimes doing this can end up costing you money.
Typically, credit card companies charge a fee when cardholders want to move their debts to another company. The price is usually a percentage of the total amount transferred by the debtor. The rate varies according to each credit card company and generally ranges between 2% and 5% of the amount transferred. Some credit card companies opt to charge a fixed amount as a fee instead of using the percentage model.
Balance Transfer Example
Many credit card companies run a promotional or introductory offer to charge zero interest on any debt transferred to an account with them. The promotional offer, created to entice new customers to sign up with the company, may allow new customers to go over six months without getting charged interest on their debt.
For example, Gregory took a credit card loan of $5000 with an interest rate of 14% APR. Six months later, he hears that another credit card company is running a promotional offer. They are offering a 0% APR interest rate for 12 months on balance transfer debt. So, Gregory transfers his remaining debt balance from the first credit card company to the new one, focusing on paying the debt without accumulating more interest.« Back to Glossary Index