One of the best things you can do to lower your credit card’s annual percentage rate of interest (APR) is to use the available balance to perform what is known as a balance transfer. A balance transfer is as simple as it sounds. You have two credit cards, one which as a higher annual interest rate (APR) than the other. The idea is to save money and lower your monthly payments. The best way to show you how to perform the balance transfer is by taking you step by step through the process using an example.
To begin, we are going to give you two credit cards. The first is your old card that has a balance due of $2000 and an APR of 18.99%. The second card is your new card, which you have been given an available credit limit of $5000 but has a much lower APR of 13.99%. The APR for your new card may not be the balance transfer rate for the amount of money you will be transferring. It should be much lower, and is often 0% for a specific period of time.
1. The first thing you want to do is to make sure the new card is activated and can be used immediately. Check to see if there is a sticker on the front of the card that gives you a phone number to call to activate it. Some banks will allow you to activate the card online by going to a website and entering in the requested information.
2. Once you are sure the card can be used, you want to call the bank and get detailed information about the rules for performing a balance transfer. Though it may sound simple, there are several problems you could encounter. The first is that there is a limit on the amount you can transfer. You may have a $5000 credit limit but the most you are allowed to transfer is $1000. Another potential problem is that the bank will charge you a fee for performing the transfer. That fee is normally 3% of the total amount you are transferring. In this example, you will transfer $2000 but you will actually see $2060 of your credit used. The other $60 came from the balance transfer fee (.03 x $2000).
3. Know the specific terms of the balance transfer. Many times people see an offer of a zero percent balance transfer rate and do not stop to look beyond today. If you are offered a zero percent rate, the first thing you need to do is to check to see how long the rate will be in force. It may be 12 months, 18 months, or even 24 months. Once that time period passes, you will be paying the normal APR (in this example, 13.99%) until the balance is paid in full. You should also ask how many balance transfers you are allowed to make in one year or if there is a limit on the total amount of dollars you can transfer between cards during the year.
4. You can perform the balance transfer by yourself or get the help of someone at the bank. Be sure to ask if there is a fee you will be charged for getting the bank’s help ($10 is a normal charge). Whether you choose to do it by yourself or gets the bank’s help, you will need to have the credit card numbers of both cards and the exact amount of the balance you want to transfer. You might have a reason to only transfer part of the old credit card balance. (For example, you may want to have more available credit on your new, lower APR card.) You should be able to do this, but be sure to check before beginning the process. Remember that the amount of available credit on your new card will be reduced by the amount your transfer from the old card, plus the balance transfer fee.
5. Before you agree to make the transfer, either when talking to the bank’s customer support people or pressing the Enter key, be absolutely sure you want to make the transfer. It is almost impossible to stop a balance transfer once you agree to the terms and conditions (by saying “yes” or pressing Enter). You can change your mind about everything up to this point, but once the action is taken, there is no turning back.
6. Once you perform the transfer, the bank will notify you that the transfer is in process. This does not mean that the actual transfer has taken place. There is some paperwork the bank needs to complete before the actual transfer can take place. This usually takes between 1 and 2 weeks, so until the process is completed you will not see any changes to the balances on either the old card or the new card.
7. After making the balance transfer there are other things you need to do. One is to decide what you want to do with your old card. It is usually a mistake to close the account because it decreases the percentage of credit you use. For example, the old card had a $2000 balance and the new card had a $5000 available credit limit. That is a total of $7000. When you performed the transfer you still had $7000 in credit, but the old card now has $2000 available and your new card has only $2940 available (the $2000 amount transferred plus the $60 balance transfer fee). The total of the 3 amounts is $2000 + $2060 + $2940 = $7000.
If you close the old card account once the transfer is completed, you will reduce your available credit by $2000 and increase the total percent of credit you have used. Instead of $7000 available between the two cards you will only have $5000, and $2060 of that amount is already used. As a percentage of your total credit used, a key number used in calculating your credit score, closing the old account will give you a utilization percent of 59.20% as compared with leaving the old credit card account open, when your credit utilization would only be 42.29%. That is about a 17% difference and will definitely affect your credit score, up or down.
8. Another step to take is to not use the old card either before or after the balance transfer is approved. You can cut up the old card to guarantee you will not use it again, or you can lock it away in a place where it is out of sight and out of mind.