A balance transfer is the process of moving debt from one credit card to another, usually to take advantage of a lower interest rate. It helps borrowers consolidate debt and save on interest payments.
How It Works
When you transfer a balance, the new credit card issuer pays off the old card balance, and the debt is moved to the new account. Many cards offer promotional low or 0% interest rates on transferred balances for a limited time.
Benefits
- Lower interest: Can reduce interest costs significantly if paid off during the promotional period.
- Simplified payments: Combines multiple debts into one account for easier management.
Drawbacks
Balance transfers often involve transfer fees (commonly 2%–3% of the amount moved). If the promotional period ends and the balance remains, interest rates may rise significantly. Carrying new purchases on the card can also lose the benefit of the promotional rate.
Final Thoughts
Balance transfers are a useful tool for managing high-interest debt, but only if borrowers have a clear repayment plan. Without discipline, fees and rising rates can offset potential savings.