One way to consolidate debt is to use a credit card balance transfer. This method allows you to transfer the balance of existing credit cards to a new one, lowering your overall costs, combining numerous payments into one, and often building your credit back up. Balance transfers are one type of debt repayment strategy that, if available, may help you build your financial well-being in the short term.

What Is a Credit Card Balance Transfer?

A credit card balance transfer is the process of opening a new line of credit (or using an existing one with an available balance) and using that available balance to pay down other debts. Moving existing debts from one account to the next may be beneficial in consolidating your debt into one place.

This type of balance transfer is often available as a benefit to opening a new account. For example, a lender may agree to provide you with a $2,000 credit limit if you transfer some of your existing credit cards to this new line of credit, paying off the debt.

How Does a Credit Card Balance Transfer Work?

Let's consider a scenario where you currently have three credit cards with varying balances and minimum payments:

• Credit Card 1: You owe $300 with a minimum payment of $20 per month.
• Credit Card 2: You owe $500 with a minimum payment of $30 per month.
• Credit Card 3: You owe $900 with a monthly payment of $60.

Your debt amounts to $1,700, and your combined monthly payments for these three cards equal $110. To address this situation, you approach a new credit card lender and request a higher credit limit account. Fortunately, they approve your request, allowing you to transfer the balances from the three existing credit cards to the new card. Consequently, your original credit cards have zero balances, and you now possess a single new credit card with a credit limit of $2,000.

With the consolidation, your new credit card carries a balance of $1,700. The new lender requires a monthly payment of $90, resulting in some savings compared to the previous combined payments. This consolidation simplifies your financial obligations by reducing them to a single monthly payment. It's important to note that the specific terms and conditions may vary depending on your unique circumstances and credit qualifications. Additionally, consolidating debts may not always be advantageous, so evaluating your situation is crucial before proceeding.

Benefits

A balance transfer credit card has potential benefits that make it a worthy choice for many people.

• Interest rates: Your new credit card could have an interest rate lower than what you pay on your other debts. That means you are paying less over time.
• Minimum payments: Your minimum payment could be lower (though that's not always true). That could mean you can pay more than the minimum monthly payment to get your debt caught up.
• Credit improvement: You now have more available credit, which means you have a lower credit utilization ratio. That could improve your credit score over time.
• One payment: You only have to make one monthly payment. That may help you to minimize the risk of missing a payment.
• Different terms: You can move your debt to a credit card with better terms, like no annual or lower fees.

Drawbacks

There are a few drawbacks that you should consider if you are considering balance transfer credit cards:

• Fees: There may be some fees associated with the balance transfer. If so, that can add to the overall cost you end up paying. Sometimes, this could mean a 5 to 10% fee on top of what you are already paying.
• Extended debt: A big concern is what happens once you pay off those credit cards. If you use them, you will have extended your debt even further, meaning you could put yourself into twice as much debt as you have now.
• Hard to get: Not all lenders offer balance transfer credit cards, and some that do only do so to people who are well qualified for them. If you don't have good credit, you may not qualify.

Completing a Credit Card Balance Transfer

Here's what you can expect from the process:

• Apply for the new credit line. The lender may offer key opportunities like a 0% APR on balance transfers or no fees for a specific time. Let the lender know when you are applying that you plan to transfer balances.
• Initiate the balance transfer. That typically is done online or over the phone. Still, you must provide some basic information about the accounts to make it happen.
• Watch for it to go through. That could take a few days or longer to complete the transaction, but you should be able to see your existing balances drop to zero.
• Pay down what you owe. Set up payments on your new account and make payments. Avoid using your other credit cards.

Alternatives to Credit Card Balance Transfers

You can qualify for other types of loans and debt consolidation tools if you do not qualify for balance transfer credit cards. That may include personal loans as well as home equity loans. Mortgage refinancing may also allow you to take some cash out of the equity in your home to pay down the debt you owe. Talk to your lender about the options that may fit your specific situation.