In layman's terms, what is balance transfer?

Question

I know very little about my credit cards, all I know is that I make sure to do the minimum payments on time. Some suggested that I do balance transfer? What is that suppose to mean? Can someone pay all my debts from different credits cards and I should pay them monthly instead of paying different credit cards issuers? Who will charge me for that? both sides?

Answer 1

Typically you can use credit card balance transfers to consolidate some, or all, of your other loan balances in one place. The interest rate might be lower. Some prefer to make one payment rather than multiple payments. There is typically a fee that is imposed by the card that is originating or creating the loan. This would be the credit card you are transferring the balances. That fee is typically in the 3% to 5% range.

While tempting and attractive on the surface, this plan typically leads to a worse situation then you are now.

It's a "tough pill to swallow", but your problem is that you spend too much money. Transferring money will not change this problem, it is your behavior that has to change in order to not accumulate more debt. It has to change further if you want to get rid of the debt in a timely fashion.

You would be far better served to forget about this transfer and get your life into control. Spend a lot less, earn more. Pay off the cards you have now and cut them up. Make a goal to be done in a year and figure out how to earn enough money to make that happen.

BTW I am a reformed over-spender that now owes nothing. Yep my house, cars, and rental property are all paid for. You can get there too.

Answer 2

Since you are not paying the full balance off each month you are carrying a balance from month to month. That balance is being charged some interest rate X.

With a balance transfer, the new credit card pays off that balance. As a result you now have a balance of the same amount (plus any processing charges) on the new credit card. Hence the balance has transferred from the old to the new. And you now pay the new credit card.

Ideally you do this because the new credit card is offering a reduced interest rate, saving you money. Though be warned often that transfer rate is a limited time deal and any left over after the window expires will be charged the higher rate.

Answer 3

Note: the question is tagged united kingdom, this is a UK focussed answer practices elsewhere may be different).

A balance transfer moves your debt from one credit card to another.

This can be a good way to get a debt onto a lower (often zero) interest rate. There will usually be a transfer fee but with a good balance transfer deal the effective interest rate even after taking the fee into account can be very good and there are even some deals with 0% interest and no fee. Indeed if you keep on top of things credit cards are often the cheapest way to borrow. Normally a balance transfer is done to a new card that is applied for specifically for the purpose but sometimes it can make sense to transfer a balance to an existing card.

However to take advantage of this you need discipline. You need to make absoloutely sure that you fully comply with the rules of the deal and in particular that you pay at least the minimum payment on time.

You should also be aware that the rate will usually jump up at the end of the interest free period, you could do another balance transfer but assuming you will be able to do that is risky as it depends on what market conditions and your credit rating look like at the time. Ideally you should have a plan for paying off the card before the interest free period expires.

In general you should be aiming to pay down your debts. Living beyond your means is very bad and carrying debt long term should only be done if you have an extremely good reason. You should regard the balance transfer as a tool to help you clear your debts quicker, not as a way to avoid paying them. If you go on a spending spree after your balance transfer you will just have dug yourself deeper in debt.

See http://www.moneysavingexpert.com/credit-cards/balance-transfer-credit-cards for more on the techniques and the current best cards.

Answer 4

A balance transfer is paying one debt instrument with another. While this is typically seen in credit card offers it isn't necessarily confined to credit cards.

Obviously the only reason to do this is refinancing debt to a lower interest rate. You need to watch for loads on the incoming money, there may be an upwards of 5% fee. This calculation is materially different than your APR. Monthly interest charges can be estimated by taking your APR divided by 12 times your balance. So a 15% APR will have a rough monthly interest charge of 1.25%. The 5% balance transfer fee is 4x your normal interest charge. That fee is added to your balance and now you pay interest on the whole amount. You need to ensure the new rate is low enough to actually benefit you after the incoming fee.

Answer 5

From the card issuer's point of view, the purpose of balance transfers is very simple. A credit card company wants you to owe them more money, so they will make more profit getting more interest payments from you.

To do that, they will offer an (apparently) good deal to transfer the debt that you owe to other companies onto their card.

The deal may superficially look good to you, because it offers a low interest rate for a limited time period, etc. But never forget that its real purpose is to be a good deal for the card company, not for you.

Of course, credit card companies target these deals at their "typical" customers. They have to tolerate a few "smart" customers who actually make them no money at all, by always paying off their card balance before any interest is due, never using their card to draw cash from an ATM (which has no interest-free loan period), never using their card for overseas transactions that incur fees and/or poor currency exchange rates, etc.

Your financial objective should be to make yourself one of the customers the card company doesn't want - but "only paying off the minimum balance every month" is exactly the wrong way to do that!