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 incentive when a new credit card account is opened. The credit card company 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 off 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 a balance transfer is extremely fast and can usually be concluded within a matter of hours. Automated services facilitate the balance transfers between card issuers.
Transaction fee A transaction fee is a one-off commission charged by the company that issued 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 usually added to the balance of the new card.
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Promotional Offers
Companies often offer temporarily lowered interest rates for promotional offers. The lower the interest rate on the transferred balance, the less the cardholder will end up repaying. Credit card balance transfers involving a 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 cardholder. It is in the cardholder's interest to seek out a low-interest rate on their balance transfer. Once the promotional rate expires, any remaining transferred balance on the card is subject to the standard interest rate.
Promotional balance transfer rates are usually only guaranteed as long as the account is current, meaning the cardholder makes 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, cardholders with large debts can repeatedly make use of this process to save significant amounts of interest repayments over a period of 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 cardholder has little incentive to repay the balance of the card resulting in prolonged 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.
Maps Credit card balance transfer
References
Source of article : Wikipedia
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