A credit card balance transfer is the transfer of the balance (the outstanding debt) in a credit card account to an account held at another credit card company.
This process is encouraged by most credit card issuers as a means to attract new customers. The arrangement is made attractive to consumers by offering incentives from the new bank or the credit card issuer. Such incentives include low or even 0% interest rates, a temporary interest-free period, loyalty points or other incentives. The 0% rate promotion is the most common when a new credit card account is opened. The credit card companies uses the process of balance transfers to secure new client accounts from their competitors. Especially low rates compared to the existing supplier entices new customers to transfer their debt. The card issuers gain new customers, what is more they know that these particular card holders are prone to accruing debt rather than paying of the balance of the card, a particularly desirable type of client.
Credit cards have an order of payments, the terms that specify the order in which balance(s) will be cleared. In nearly all cases payments are applied to the lowest-rate balances first and the highest-rate last. In some countries such as Australia and Germany legislation requires the card company to apply payments to the highest-rate balances first. The banks invariably apply the set the order of payment to ensure any balance at a reduced or fixed rate will be paid off sooner than new purchases or cash advances at a higher rate. By avoiding making purchases or taking cash advances, the borrower can ensure that interest accrued every month is at the low beneficial rate of the original balance transfer.
The process of balance transfer is extremely fast and can usually be concluded within a matter of hours. Automated services facilitate the balance transfers between card issuers.
Card holders trying to make a decisions on whether or not to transfer a credit card balance should consider the following three factors:
The rate on the new promotional offer. The lower the interest rate on the transferred balance the less the card holder will end up repaying. Credit card balance transfers involving transfer of funds from a high interest credit card or a store card to a low or zero-APR credit card will result in a reduction in monthly interest fees for the card holder. It is in the card holders interest to seek out a low interest rate on their balance transfer.
Length of promotional rate. Invariably the low or 0% 'teaser' interest rate temporary. The length of time the low rate lasts vary from (typically) 6 to 15 months. Promotional rates in the UK have historically been longer than in North America, with (typically) 6 to 35 months available for UK balance transfers. Once the promotional rate expires any remaining transferred balance on the card is subject to the standard interest rate. Since the low rate is fixed if the transferred balance is paid in full before the promotional rate ends it no longer applies to any debt on the card. There may be ways of extending the teaser rate or at least preventing it from disappearing prematurely. Customers should pay attention to the length of time of the opening offer, since once it ends there will usually be a significant increase in interest rate. This increase is the card issuer's opportunity to recoup income lost whilst the promotional rate was in force. This can, of course, be countered by immediately transferring the balance of the card to another card issuer, if another promotion exists.
Transaction fee A transaction fee is one-off commission charged by company who issue the credit card the balance is being transferred to. This varies from (typically) 1-5% of transferred debt usually with a minimum value and sometimes with a maximum capped amount. The fee is ussually added to the balance of the new card.
Promotional balance transfer rates are usually only guaranteed as long as the account is current; In order to ensure the account is current the card holder must make at least the minimum monthly payment by the agreed date every month. Failure to make these payments will usually result in the withdrawal of the promotional interest rate and reversion to the much higher standard rate.
Since performing a balance transfer to new credit cards often results in a lower interest rate, card holders with large debts can make repeatedly make use of this process to save significant ammounts of interest repayments over a period the years. The ideal approach is to switch to a new credit card the moment the previous one's teaser rate has expired. To deter this type of behavior, some credit card issuers have stopped offering no fee balance transfers. There is a caveat: the credit card contract may include a clause preventing the credit card holder from transferring the balance a second time within a certain period of time.
Whilst the promotional interest rate applies and the minimum payment value remains low the card holder has little incentive to repay the ballance of the card resulting in prelonged debt. In the USA card issuers are under pressure from various Federal agencies to increase the minimum payment value , 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.
Video Credit card balance transfer
References
Source of the article : Wikipedia
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