Who Really Benefits From a Balance Transfer Card?

If you’ve been looking into a balance transfer card, you might be wondering if it’s a little too good to be true. Does the consumer or the credit card company benefit more from this type of card? Believe it or not, it can be a mutually beneficial situation.

How Do Credit Card Companies Make Money?

Charging Interest

Most of the money credit card companies make comes from interest payments. Issuers typically charge interest when you carry a balance month to month. However, you can avoid paying interest when you pay your balance in full each month.

Fees

Credit card companies also make money off of people with bad credit who end up having to pay a lot of fees. Some companies actually earn more from fees than from interest. There are annual fees, cash advance fees, balance transfer fees and late fees.

Annual fees are typically reserved for cards with high rewards rates and for people with less than idea credit. Cash advance fees are charged for people who use their cards to get cash out of an ATM. When you transfer your balance from one card to another, credit card companies charge a balance transfer fee. Late fees are issued for those who don’t pay their minimum payment by the due date.

Interchange

Credit card companies also make money from interchange. An article written by Melissa Lambarena for nerdwallet.com explains, “Every time you use a credit card, the merchant pays a processing fee equal to a percentage of the transaction. The portion of that fee sent to the issuer via the payment network is called “interchange,” and is usually about 1% to 3% of the transaction. These fees are set by payment networks and vary based on the volume and value of transactions.”

How Do Balance Transfer Cards Benefit Consumers?

Consolidate Debt

If you have many different credit cards, you can transfer multiple balances to one card. Typically when you sign up for a balance transfer card you have a 0% interest period. It can be a big deal for someone to go from paying around 20% interest to no interest. Consolidating your debt makes things easier to manage too. Instead of paying multiple card payments, you can focus on paying one card, one day a month. Having your debt organized in a manageable way means you can also avoid paying late fees. Keep in mind that if you’re going to move your debt to a balance transfer card, you need to make sure you have a plan to pay off your balance as quickly as possible. Put all of your focus into getting out of debt.

Save Money On Interest

If you’re approved for a balance transfer card with a lower interest rate than your current card, you can save a tremendous amount of money on interest. When you’re not accruing additional fees on your card for carrying a balance from month to month, you can pay down the debt faster. The average credit card has an interest rate of 14%-24%. Balance transfer cards are appealing because they typically offer 0% interest for a set amount of time. It’s a great opportunity for you to get out from under your debt.

More Favorable Terms

Some people find that the biggest benefit of a balance transfer card is simply having a credit card with better terms. An article written by Melanie Lockert for creditkarma.com explains, “You may feel stuck with your current credit cards, dealing with high interest rates and terms that don’t offer you much as a cardholder. Depending on the card you get approved for, you may be able to move your debt to a credit card that has a lower interest rate and more favorable terms. You may even be able to find a balance transfer card that offers perks that can earn you rewards. But you might want to wait until your transferred balance is paid off before you take on new credit card debt.”

Having a balance transfer credit card can be mutually beneficial to both the credit card company and the consumer. However, a large part of the benefits depend on you. Do your research, make sure you find a card that will make a positive impact on your finances now and in the future. Finally, create a plan to pay off your balance as quickly as possible. Failure to do so means you will see fewer benefits from your new card.