What is a Credit Card Balance Transfer
Credit card companies today offer a variety of features and rewards to attract new customers. Many of these features involve introductory specials for new cardholders only. These specials can include upfront bonuses of cash, points or miles. Card companies also offer low introductory interest rates on purchases for some number of months. And one feature that has proven very popular is a balance transfer offer.
What is a Balance Transfer
A balance transfer is a feature offered by many credit cards that allows cardholders to transfer high interest debt from other cards. 0% Balance transfer offers typically come with a low introductory interest rate, often as low as 0% APR. But it is important to remember that not all cards offer zero interest. In fact, some transfer offers are as high as 5.99%, and the 0 APR offers generally only apply when consumers apply for a new card. As a special promotion, however, card issuers will offer existing customers a low rate transfer for a limited time.
The length of the introductory offer varies from card to card. Most balance transfer rates last 6 to 12 months, although 3 month and 15 month transfer periods do exist. Once the introductory rate expires, any remaining balance accrues interest at the regular APR applied to the card. As a result, if the balance is not paid off before the low rate expires, cardholders can easily end up paying double-digit interest on the unpaid balance.
How are Balance Transfers Used
Most cardholders use balance transfers for one of two purposes. The first is to consolidate high interest debt onto low rate cards. Transferring debt at double-digit interest rates onto a no interest card can save hundreds if not thousands of dollars. As a result, balance transfers can be a smart way accelerate debt repayment, as more of the monthly payments go to principal, not interest.
The second way cardholders use transfers is through what is known as balance transfer arbitrage. Arbitrage is simply borrowing money from the card transfer at 0% and investing it in a high yield savings account. Before the no interest offer expires, the credit card is paid in full, leaving the cardholder with the interest earned from the online savings account. Because most balance transfers today come with transfer fees, and because the interest rates paid by banks has fallen below 1%, the practice of arbitrage has been significantly reduced.
