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What is a Balance Transfer?
This a fairly simple process whereby someone who has debt on an existing credit card can transfer the balance to a new credit card. The question is, why would someone do this? In order to attract new customers, the new credit card will offer a special low introductory offer. If you shop around, you can often find a 0% ‘Balance Transfer Card.’ For example if you owe $4000 dollars on credit card A and that credit card has an APR (Annual Percentage Rate) of around 22% to 24% means that over the course of a year, you would pay $220 to $240 per year in interest payments to the credit card company unless you can afford to repay the outstanding amount every month.
‘Balance Transfer Cards’ often offer an introductory period in which the low interest rate is in operation. For example, a credit card may offer a 0% balance transfer rate for 12 to 24 months which means that you would only have to meet the minimum monthly repayment which is normally 5% whilst paying down the debt and avoiding interest charges. One small caveat is that there is usually a fee charged for the transfer which is typically 3 – 5% of the balance transferred from the original card. Therefore a $1000 balance transfer fee would cost between $30 to $50. It would be helpful to compare the balance transfer fees against the saved interest charges in order to decide if this the right decision to make.
