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September 27, 2019

Balance Transfers: Everything You Need to Know

The Basics

A balance transfer occurs when you transfer an existing balance from one account to another. Accounts could be in the form of a credit card, a personal loan, a home loan, or other types of loans. 

Common reasons for initiating a balance transfer is to take advantage of decreasing interest rates, lower your monthly payments and consolidate multiple payments into one easy payment. Balance transfers for a home loan may also be initiated because you are not satisfied with the servicing by your current loan provider.

The easiest way to conduct a balance transfer is over the phone or online. Depending on the bank or provider, a balance transfer could be completed in a matter of minutes. Transfer limits will be determined by the banking institution.

When initiating a balance transfer you should make sure that you have your current account information on hand including your account numbers, bank names, account, and routing numbers and the amount that you would like to transfer. This information is needed to process the transfer from one account to another.

The time frame for processing a balance transfer is dependent upon the institutions involved and the type of transfer. It can take as little as a few days to as much as several weeks before a balance transfer is fully processed. A mortgage loan transfer could take longer. During this time, it is important for you to continue to make regular payments on any existing accounts that may be impacted by the balance transfer. Failure to make your regularly scheduled payments could result in late fees, other penalties, and negative credit reporting.

Tell Me More…

There are a variety of factors to consider when deciding whether a balance transfer is right for you. Balance transfers are ideal if you have extremely high interest rates on your current debt, want to make fewer payments instead of multiple payments every month, and whether there are good promotional offers available if you do a balance transfer. Balance transfers will assist you in managing and tracking all your accounts.

When considering a balance transfer, you should be familiar with the fees associated with it, as they could be significant. These fees include processing fees, prepayment charges, penalty fees, and transfer fees. Processing fees, for example, could amount to 0.5% to 1% of the loan. If you have a large loan, this fee could be very high. 

Credit also should be considered when you are deciding whether to initiate a balance transfer. Good credit is an important factor. Your credit score, the length of time you have had credit, your payment history, and your debt ratio will have an impact on whether you are approved for a balance transfer. Your balance transfer will likely be declined if your current credit accounts are maxed out or if you have a poor payment history on your existing accounts. 

Only people who are responsible with their debt should consider a balance transfer. You should be confident that you can effectively manage a zero-balance account. You may be tempted to run up the account balance again after a balance transfer has been processed. This should be avoided because you will get yourself deeper into debt. Restraint is key in managing debt after a balance transfer. You should always have a debt management plan in place and carefully read any terms and conditions associated with your balance transfer.

Intro APRs vs. low, fixed APRs

Introductory APRs for balance transfers can be very attractive. Introductory APRs can be as low as 0% for a certain length of time from when you do your first transfer. Promotional periods can range from a few months up to 24 months. 

Promotional periods allow you time to pay your transferred balance at a very low interest rate. As a rule of thumb, you should develop a plan to pay off your balance during the promotional period to avoid interest charges. Introductory APRs are ideal when you have a small balance to pay in a relatively shorter amount of time (e.g. 21 months).

Low, fixed APRs for balance transfers do not have an introductory 0% APR. Instead, a low regular fixed APR is offered and there is no introductory, promotional period. The APR stays the same and will not increase after a certain period of time. Fixed APRs are ideal if you need longer than a year or two to pay your balance.

Is This For Me?

If you are in a good financial position, meaning you have a steady income, a job, a good credit score and an acceptable amount of debt, a balance transfer may be right for you. Balance transfers can be ideal for both personal loans and home loans. The goal of both is to lower monthly payments, reduce interest, and save money.

Advantages and Disadvantages

Advantages:

  • Lower payments will help you to reduce and/or eliminate your financial burden and save you money.
  • Better interest rates will allow you to repay your loan quicker.
  • Lucrative deals such as favorable terms and conditions and incentives may be offered by a bank if you do a balance transfer with them.
  • Dissatisfaction with your current lender could be eliminated if you transfer your debt to another lender who provides better customer service.

Disadvantages:

  • Adding additional debt may do more harm than good. When you do a balance transfer, you are essentially opening another debt account. If you are not disciplined, you could easily put yourself back into debt. It is important that you have a plan in place to repay your debt.
  • You may not be able to transfer your entire balance. The bank determines what your limit will be. The limit that is given to you may not cover all the balances that you would like to transfer over.

Conclusion

Overall, balance transfers are a good way to have better control of your debt and finances. Your debts can be consolidated, and you will see some savings in the amount of interest that you pay. When transferring debt, you should always read the terms and conditions, understand them and have a plan in place to fully alleviate your debt. 

Before initiating a balance transfer, you should make sure to research solutions to your issue and choose the best one based on your situation. Planning and patience will be key in the process.