How does a credit card balance transfer work? 

Coles Financial Services 30th May 2015 in Credit cards

What is a credit card balance transfer? 

What is a credit card balance transfer? 

A credit card balance transfer is when you transfer an amount you owe on one credit card account to another credit card, usually from a different provider. A promotional interest rate then applies to the transferred amount for a limited period of time. For example, 0% interest for 6 months. 

It’s common for providers to offer balance transfers to new customers. Each provider has its own rules but they typically allow you to transfer your balance from one or two cards. 

So what happens to your old credit card? Your new provider pays the approved balance transfer amount to your old credit provider. This reduces (or completely eliminates) the outstanding balance on your old credit card account. 

Your new provider then charges interest on the amount you’ve transferred at the balance transfer rate until the limited period ends. After this time, interest is charged on the remaining balance according to your new credit card’s standard interest rate.

How does a credit card balance transfer work?*

  1. Compare credit cards
    Compare credit cards that offer balance transfers. As well as the balance transfer rate, remember to consider the standard interest rate, any rewards, annual fees and other benefits cards might have. Even if a balance transfer offer sounds great, you want to be happy with the credit card when the promotional interest period finishes. Most importantly, check that the new provider accepts balance transfers from your current provider.
  2. Apply for the new credit card
  3. Complete a balance transfer request form
    Once approved for your new credit card, submit a balance transfer request form. This form will tell your new provider how much of your balance you’d like to transfer and from which accounts. Consider your maximum transfer limit. That is, the percentage of your new card’s credit limit that can be used for your balance transfer. It’s usually somewhere around 95%. Check if there is a minimum balance transfer amount too.
  4. Keep paying your monthly repayments
    Continue to make any necessary payments to your old account until you’re notified that your balance transfer was successful.
  5. Close your old credit card account
    This step isn’t mandatory. It’s your choice whether you want to keep your old account. Plus, if you have a balance remaining in the account you need to keep it open until you pay it off.
  6. Start paying your new credit card’s monthly repayments
    Pay your minimum monthly repayments on your new card. Or, if you want to pay the card off before the balance transfer rate finishes, you’ll need to pay more than the minimum amount. Check when your balance transfer rate finishes; it usually begins from date your application was approved (not when you received the credit card). 

Should I apply for a credit card balance transfer?

You need to consider your personal financial situation to decide whether a credit card balance transfer is right for you. Some benefits of a balance transfer may include:

  • The ability to pay off your credit card balance faster
  • Reduced fees and interest from multiple cards
  • One monthly repayment

Do purchases I make during the balance transfer period accrue interest?

The balance transfer rate won’t apply to purchases or cash withdrawals you make on your new card. For these transactions, most providers will charge you interest at the standard interest rate. 

Also, many providers won’t give you any interest free period for purchases you make while the balance transfer rate applies. The interest free period refers to the time you have to pay off your credit card balance before interest is charged to your account. 

So if you use your card to make purchases while a balance transfer rate applies to your account, you may have to pay interest calculated on the amount of the purchase from the date of the transaction. 

Since credit providers have different rules, it’s always best to check your terms and conditions.

* All credit card terms and conditions are different, but this article is a simple guide on a common process for completing balance transfers. Check with your current and new credit card provider for specific information on their process.

Tags: credit card debt minimum repayment monthly repayment annual fee interest rate balance transfer interest credit cards credit card tips