One of the most interesting — and often most lucrative — kinds of credit card deal out there is the balance transfer offer. Instead of offering, say, bonus air miles or a one-time cash back bonus to attract new customers, the credit card company instead chooses to offer 0% Introductory APR on a transferred balance from an existing card account at another financial institution.
Although not as “glamorous” as 20,000 bonus air miles or a $100 statement credit, for many cardholders a balance transfer can be far more lucrative over the long-term. Let’s take a look at one hypothetical example of how this works, and then I’ll show you one of my favourite balance transfer deals (featured at the bottom of the page here if you want to skip this example).
Let’s say you have a $10,000 outstanding balance on your Citi credit card account, an account you’ve had for several years now. The promotional interest rate has expired, and now the card has a standard APR of 15.74%. You are only making minimum payments each month.
A balance transfer offer from another company, Discover or maybe Chase, catches your attention one day and you apply for it. Since you have good credit (don’t apply for a balance transfer card until you have good to excellent credit; balance transfers are typically extended to customers that are deemed “good risks”), the card company is willing to offer you 12 months of 0% Intro APR on your transferred balance as an incentive to win your business away from your other bank.
In this hypothetical example, this means your $10,000 Citi balance is paid off by the new card company within 4 weeks or so of being approved for the balance transfer. Now you send your payments to the new card account, as the debt is owed to them, not to Citi.
And since the promotional rate is 0%, instead of your previous 15.74% rate, doing this balance transfer might save you a whopping $1,500 (or more) over the next 12 months.
Three quick reminders about balance transfer offers:
1) Typically, the balance transferred must be from another bank or financial institution. Balance transfers are provided as a means to win new business for the bank. They won’t be interested in transferring a balance from an existing account within the same bank or family of companies. So, in other words, if you have a Citi card balance you want to transfer, you should look to a bank OTHER THAN Citi for a balance transfer — find one of their competitors and see what deals they can extend to you.
2) Once the balance is transferred, don’t sit back and make minimum payments. Of course, you CAN do this, but since I advocate remaining (or becoming) debt-free as quickly as possible, you should use that 0% promotional APR period as a time to AGGRESSIVELY and consistently pay down your balance. Ideally, you’d have the whole balance paid off before the promotional rate expires, so you pay no interest whatsoever.
Click here to see my current favourite balance transfer offer, from Discover. They offer a 60 second online decision in a lot of cases, which is very cool. More balance transfer promotions can be seen and compared within Outlaw‘s deals portal (select Sort By 0% Balance Transfers in the top right-hand dropdown menu).
3) Also, if your credit is not good, spend several months paying down your balances as aggressively as possible and optimising your credit utilization ratio BEFORE you apply for any balance transfer card. As explained above, credit card companies typically reserve balance transfer offers for those with excellent, proven credit histories.
It’s too bad, because balance transfers would (quite obviously) most benefit those who are facing a temporary credit crunch or a financial hard time. But banks are not charitable organisations; if they don’t think there is an excellent chance you will repay the loan in a timely fashion, you can usually rule out the possibility of a 0% transfer offer.
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Disclosures: We’re a credit card promotions site, and as such we maintain financial relationships with numerous banks and financial institutions, including some of the offers and cards mentioned or featured herein. This article originally appeared in slightly different form on Credit Card Outlaw‘s homepage.
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