What is a Balance Transfer? How to Benefit & Save Money on Interest

What Is A Balance Transfer

Shifting existing debt from one or more credit card accounts to a different credit card is called a balance transfer. You will owe and send your payments to the new issuer.

Balance transfer credit cards can work strongly in your credit and financial favor when the interest rate is waived or much lower than the average rate on your existing accounts. But they only provide that benefit if you pay the debt before the regular rate goes into effect. 

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How Balance Transfers Work

With a balance transfer, you arrange with a new credit card company to assume the debt that you have on one or more separate accounts. It would benefit you when the interest rate is considerably lower than the average rate on your existing accounts. 

This is usually the case because balance transfer credit cards typically have interest rates of 0% for at least 12 months, while the regular APRs on many credit cards are typically 22% or higher. 

Potential balance transfer savings graphic
You can save a significant amount of money through a 0% balance transfer deal.

As with any credit card, the balance transfer credit card will allow you to make smaller monthly payments on the debt. As long as you meet the minimum payment, no interest will be added to the amount you owe during the introductory APR time frame. However, any remaining balance after that will be subject to the regular rate associated with that credit card. 

In some cases, the regular rate will be higher than on the original accounts. For this reason, it is advisable to plan to repay the entire balance before the regular rate goes into effect. 

How to Perform a Balance Transfer

To get a balance transfer, follow these steps:

1. Review available offers. Almost all major credit card issuers offer balance transfer credit cards, and each has its own terms.  If you are looking for one that has the longest 0% APR deal, focus on those issuers. If you want one that has the lowest ongoing regular rate after the 0% APR lapses, identify those accounts. 

Some 0% APR balance transfer credit cards also extend the deal to purchases during that same time frame, so if you use the credit card to buy things, you may come out ahead. Want a card that comes with rewards or cash back? You can easily find one to meet that goal, as well. 

2. Make sure you fit the qualifications. Balance transfer credit cards typically require good to excellent credit scores. If you have been late on payments, accounts are in collections, or your credit utilization ratio is too high, your credit scores may not qualify you for the balance transfer credit card you want. 

To avoid an unnecessary hard credit inquiry on your credit report that can drop your scores further, read the eligibility conditions and only apply for the card that matches your credit rating. Another way to narrow your choices is to use a credit card company’s pre-qualification program. 

Impact of hard credit pull graphic

Many give you the option to complete an online form, which will allow the issuer to review the basics of your credit and financial profile and then let you know which cards may be within your reach.

3. Beware of limitations. The new account may not have a credit limit high enough to absorb all of your debt on existing accounts. But you won’t know how much the limit will be until you actually apply and are accepted. 

Also, some credit card issuers will only allow you to use up a percentage of the limit for the transfer, such as 75% or 95% of the credit line. 

4. Know which debts can be transferred. You will not be able to switch the debt from a credit card with the same issuer to a balance transfer card they offer. 

In general, balance transfer credit cards are designed for those who have other credit card debt. However, some allow loan balances, too. If that interests you, confirm this is an option with the issuer.

5. Contact the issuer to make the transfer. Once you are approved for the balance transfer card, you’re ready to make the transfer. Decide which debts you want to add to the new account, then log onto the credit card issuer’s website. 

You will see prompts asking you to provide the existing issuer’s name, the account number, and the amount you want to transfer. Some issuers let you conduct the transfer over the phone or with a check they sent for this purpose. 

However you do it, the new issuer will process your request. Online transfers usually take just a few minutes, though other methods can take weeks to complete. 

6. Check your balances on existing accounts. The new credit card company will let you know that the transfer went through. At that stage, the balance on your existing cards will either be deleted (if the transfer was enough to absorb it all) or reduced (if the new card could only take part of the debt), and you can begin managing that debt on your new credit card.

In either case, you will want to confirm that the transaction was accurate with the original card and keep it open if you want to use the account in the future.

Balance Transfer Fees

Almost all credit card issuers charge balance transfer fees. The typical range is between 2% and 5% of the balance, and the fee will be added to the debt. Therefore, if you are shifting $5,000 to a new card, the balance transfer fee will likely be between $100 and $250.

Example Balance Transfer Fees graphic

If you are only transferring a small sum, the new issuer may impose a minimum transfer fee, which can be a higher percentage. For example, if a balance is $200, 3% would be $6, but the minimum fee could be $10. 

The major selling point of 0% APR balance transfer cards is the savings. Even with the added balance transfer fee, the amount of money you can save by shifting a high-interest debt to a card that doesn’t charge interest for a specific time frame can be substantial.

Example: Imagine you have a $5,000 balance on a credit card with 27% APR. By making fixed monthly payments of $204, the total interest would be $2,348, and it would take 36 months to get out of debt. 

On the other hand, if you were to transfer the entire amount to a new card offering 0% APR for 15 months with a balance transfer fee of 3% and paid it off in that time frame, all it would cost you is the fee of $150. Although the monthly payment would rise to $344, you would save $2,198 in interest. 

When to Consider a Balance Transfer

  • You have high-interest debt. The more your current creditors charge you, the more you will benefit from a 0% APR balance transfer card. 
  • The balances are large. When high balances are combined with high interest rates, the total fees can be extreme. A $10,000 balance on a 29% APR card will cost you $242 in interest — a good portion of the minimum expected payment of $342.
  • You want to consolidate multiple payments. Simplifying your financial management system so you only have one credit card to pay rather than several can make your life much easier. 
  • Your credit scores are at least 670. FICO Scores range from 300 to 850, with a higher number indicating less credit risk. To qualify for a great balance transfer credit card, you will probably need to have a score of at least 670, but possibly higher. 
  • The new payments are affordable. If your aim is to get out of debt before the regular interest rate is imposed, the monthly payments may be much higher than what you have been paying. Make sure you can handle them.
  • You won’t get into more debt. When the debt on the original accounts is either much lower or paid off entirely, you have to be careful not to run up the balances again. If you do, you’ll owe not just the balance on the new card but on the old cards as well. That will hurt your financial circumstances and your credit rating. Only consider a balance transfer card when it helps you get out of debt, not get back into it. 

Pros and Cons of Balance Transfers

Balance transfer credit cards can be advantageous, but they may also have downsides. Here are the pros and cons. 

Pros

  • Reduced Interest Costs: You can potentially save thousands of dollars on interest that you would have otherwise paid. The money you save can be used for anything from funding an emergency account to purchasing something you want or need. 
  • Debt Consolidation: A single payment versus multiple payments can streamline your financial affairs. 
  • Potential Credit Score Improvement: Emptying debt from revolving credit products such as credit cards will expand your credit utilization ratio. That will help your credit when owing too much has hurt your scores. When you pay off the transferred balances quickly and with consistent payments, the new issuer will send that positive information to the credit reporting agencies, further helping your credit scores.

Cons

  • Balance Transfer Fees: Almost all credit issuers charge balance transfer fees, which will automatically increase your debt. If you can negotiate with your current creditors to lower the interest rate and pay off the bill very quickly on your own, a balance transfer card may not be worth the cost.  
  • High Post-Promotional Interest Rates: If there is a debt after the 0% APR promotional period, it will be subject to the account’s regular interest rate. In some cases, it may be higher than the rate you have on your current cards. If you are not dedicated to repaying the debt in full, a substantial remaining balance could cost you more than you anticipate. 
  • Temptation to Spend: The original credit card accounts will be free to use again. While there is nothing wrong with charging goods and services that you can forward to repay in full by the due date, many people end up overcharging on those cards again. This can lead to additional debt and high financing costs but with fewer options for resolution.

How to Choose a Balance Transfer Credit Card

There are countless balance transfer credit cards on the market, so it’s important to pursue the one that makes the most sense for you. 

Compare the Length of Promotional Periods

Typical 0% APR credit card balance transfer deals last for 12 months. However, some can be much longer. You may have 15 months, 18 months, and even 21 months to repay your debt. 

If you need a longer time frame, consider one of the cards with exceptionally long promotional periods. Always calculate the monthly payment needed to pay off the debt in full by the end of the promotional period and ensure it fits within your budget.

Assess the Fee Structure

Do not open a new credit card until you review all of its fees, which should be easy to find on the issuer’s website. In addition to the transfer fee, look for the following. 

  • Late fees: As long as you pay on time, you will not be charged a late fee.
  • Over-limit fees: Keep the balance below the credit line.
  • Regular interest rate: You will see how much the APR will go up when the promotional time frame ends.
  • Penalty interest rate: If you pay late or mismanage the account in other ways, the issuer has the right to raise the interest rate for up to six months.  
  • Foreign transaction fees: If your credit card charges foreign transaction fees when you use it internationally, be prepared to pay between 2% and 3% for each transaction. 
  • Cash advance fees: Most cards allow you to take cash from the credit line, but it will usually cost you 5% of the advance or $10, whichever is the greater amount. 

Identify Additional Card Benefits

Opening a new card is not a one-time deal but instead the beginning of a relationship that can last many years. For this reason, it is important to consider all of the card’s features and not just the balance transfer advantages. You may want a card that provides you with the following: 

  • Cash back. With a cash back card, you will earn a percentage of your transactions back. The money will be returned to you either as a statement credit, cash, or to purchase items such as gift cards from the issuer’s shopping portal. 
  • Rewards. Some credit cards offer you opportunities to rack up points or miles as you charge. You can redeem those for everything from flights, hotel rooms, and products and services. 
  • Perks. Credit cards can also come with a variety of perks. They vary by account and issuer, so review them and decide on the best matching card. For example, you may get free checked baggage at the airport, shopping credits at certain stores, increased warranties, or insurance on products that you purchase with the card. 

Strategies for Effective Balance Transfers

Optimize your balance transfer to maximize financial benefits. Here is how you can get the most out of this strategy.

Time Your Transfer Right

A financial decision such as transferring balances to a new credit card is serious business. You may want to pay some debt down or improve your credit scores before attempting a large balance transfer.

This can increase the odds that you get the most lucrative and attractive deal possible. It can also instill some of the financial discipline you’ll need to stay consistent with your purchases and payments.

Make Payments on Time

The credit card issuer that assumes the balances on your current cards will be supplying information about the account to the three major credit bureaus: TransUnion, Equifax, and Experian. 

As you make payments by or before the due date, your credit report will reflect a stream of positive activity.

FICO factors chart

Payment history is the most important credit scoring factor, so when a lender or card issuer assesses the information on your reports, all of those on-time payments will work in your favor. 

Create a Payoff Plan

Working out the math in advance will be essential to ensuring that the balance transfer arrangement will be beneficial. Create a payoff plan so you are certain that you will eliminate all or most of the balance before interest is added. 

The calculation is simple: Add the balance transfer fee to the debt you move to the new card. Then divide that figure by the number of months you have to repay the balance within the interest-free time frame. 

Here are a few examples:

$2,000 balance + 3% transfer fee on a 0% APR card lasting 12 months: $2,060/12 = $172 monthly payment. 

$5,000 balance + 2% transfer fee on a 0% APR card lasting 15 months: $5,100/15 = $350 monthly payment.

$8,000 balance + 4% transfer fee on a 0% APR card lasting 18 months: $8,320/18 = $463 monthly payment.

Alternatives to Balance Transfers

Consider other ways to manage credit card debt if a balance transfer card isn’t ideal or if an attractive account is not available to you.

Personal Loans

Paying off your debt with a personal loan can be helpful when the interest rate is lower than what you currently pay. There are other advantages, too. 

As with a balance transfer card, you can consolidate multiple accounts into one. The monthly payment will be consistent, and the interest rate will usually be fixed. If you need to pay off maxed-out credit cards, it can also help your credit rating. 

Debt Management Plans

Nonprofit credit counseling agencies offer debt management plans to people who are struggling with their credit card debt. As long as you have enough money to pay your combined payments over three to five years, you can send one payment to the agency, which will distribute the funds to your creditors. 

benefits of debt management plans graphic

Many credit card companies have agreed to reduce the interest rates for people who pay through these types of programs.

Negotiate Directly with Creditors

Another way to escape expensive credit card debt is to contact your credit card issuers and ask if they can help you out. Some will lower the interest rates and eliminate fees with a simple request.

This is especially effective if you have been making all of your payments on time and have had the account for many years. Point out how you have been a good customer and how you would like to maintain a great relationship in the future. 

Balance Transfers Can Save You Money on Interest

When used wisely, balance transfers can be a lifeline for those who find themselves struggling with high-interest debt. Products that offer a 0% introductory APR for a set number of months can give consumers time to shift their outlook and gain a financial foothold.

Be wary of the regular APR after the promotional period ends. If it is too high, you could rack up more debt if you don’t pay off the balance you transferred.