Credit card balance transfer is the action of transferring a balance, which is the amount owed to a given credit card account, to an account held by another credit card company, where both accounts are held by the same user.
This process is actively encouraged by almost all credit card issuers as a means to attract new customers. Such an arrangement is attractive to the consumer because the new bank or credit card issuer will offer incentives such as a low interest or interest-free period, loyalty points, or another combination of incentives.
An order of payments for every credit card specifies which balance(s) will be paid first. In nearly all cases, payments apply to lowest-rate balances first, then to highest-rate balances last. (Some countries, like Australia and Germany, require payments to be applied to the highest-rate balance first.) Any balance under a teaser rate or fixed rate will be paid off sooner than any purchases or cash advances, which usually have the highest rate. By avoiding making purchases or taking cash advances altogether, the borrower can ensure he or she maintains the full benefits of the original balance transfer.
The process is extremely fast and can be concluded within a matter of hours in some cases. Automated services exist to help facilitate such balance transfers. Other similar services do exist, but they may not be free to use.
Decisions on whether or not a cardholder decides to transfer one's credit card balance can depend on a combination of things: the cards' APRs, any teaser rates, and transaction fees.
Video Credit card balance transfer
APR
A low interest rate from the bank or credit card company is to the advantage of the consumer. Usually the transferred balance will be subject to the same rate as the card's purchase rate, and the same terms will apply to purchases that may be interest-free until the payment date for the statement on which the transfer appears. More often such transferred balances move immediately to the full purchase rate. Credit card balances involving the transfer of funds from a high credit card or a store card to a low- or zero-APR credit card will reduce the cardholder's monthly bill.
Maps Credit card balance transfer
As an attempt to lure new customers, a credit card company may offer new customers a teaser rate--an especially low rate to entice them to transfer their balance. Transferring customers then have lower interest payments, which means lower initial monthly outflows of money to the credit card company. A 0% rate is most common when a new credit card account is opened.
The duration of a teaser rates varies (typically) from 6 to 15 months, after which the remaining transferred balance is subject to purchase rate. Teaser rates in the UK are generally longer than in North America, with (typically) 6 to 35 months available for UK balance transfers. If a customer fails to keep the account current (make payments on time) the credit card company may withdraw the offer rate. After the introductory offer expires, the interest rate may suddenly increase, which gives the lender the chance to recover the losses incurred by providing the low introductory rate. Customers can at times avoid this new and higher rate by switching to yet another credit card company.
A low rate is fixed until the transferred balance is paid in full. This type of offer is usually guaranteed only as long as the account is current (see Teaser rate). While this allows the borrower to save interest on his or her existing debts without the need to initiate further balance transfers once a teaser rate offer expires, the fixed offer rate is higher than the limited duration teaser rate offer. (Typically, it may be between one-half and two-thirds of a fixed rate, fixed term personal loan.)
Transaction fee
A transaction fee is a commission the credit card company earns by gaining a customer's business. It is a direct transaction of money from the user to the company. This commonly varies from 1-5% of transferred debt--sometimes with a maximum capped fee.
A person can repeatedly switch to a new credit card the moment the previous teaser rate expires, and thereby save money on interest. However the credit card contract may include a clause preventing the credit card holder from transferring the balance again within a certain period of time. Personal finance self-help sources recommend considering ways to extend the initial teaser rate and at least prevent it from disappearing prematurely.
To deter frequent balance transfers, many credit card issuers have stopped offering no-fee balance transfers. Additionally, under pressure from various Federal agencies, card issuers have raised minimum payment requirements to ensure cardholders actually pay off their balances. These changes have made it less attractive to carry debt, despite any promotional APR that may be included in the offers.
References
Source of article : Wikipedia
0 Comments