If you’ve racked up debt on a high-interest credit card, transferring the balance to a low-rate card sounds enticing — but it’s not quite as simple as it sounds
What is a balance transfer and how do they work?
A balance transfer is the process of transferring high-interest debt from one or more credit cards to another card with a lower interest rate. This will help you pay off debt faster, since more of your payments will go toward the principal balance each month instead of toward interest charges.
How does a balance transfer work?
You can apply for a balance transfer when you apply for a new credit card or wait until after you’re approved, though it’s generally best to get the process started as soon as possible. You’ll just need to know the account number for your existing balance and how much you want to transfer. Your new issuer may approve the full amount or only part of it, depending on your credit limit and the issuer’s transfer limits. Once your transfer goes through, you’ll make payments to your new creditor.
There are three main elements to consider in a balance transfer card:
- Introductory APR period – Many balance transfer cards offer you a chance to make no-interest payments for a number of months on your transferred balance. After this introductory period ends, however, you’ll be charged interest on any remaining balance, so ask yourself if you’ll realistically be able to make a dent in your balance in the time offered.
- Ongoing APR – After your card’s promotional period ends, you’ll be charged interest at the card’s go-to rate. This rate is important to keep in mind in case you aren’t able to pay off your debt during the introductory period. After all, it may be even higher than your current interest rate.
- Balance transfer fee – Most cards charge a fee in exchange for your balance transfer – usually 3%-5% of the balance you want to transfer (or $5-$10, whichever is greater). This amount is added to your total balance.
With these details in hand, use a balance transfer calculator to do the math before you apply for a new balance transfer card to see if it makes financial sense to move forward.
Should I do a balance transfer?
A balance transfer may be a solid debt repayment strategy, allowing you to save on interest and chip away at your balance over time, but it’s not the best option for everyone. Consider the following to be sure a balance transfer is right for you:
- How much do you need to transfer? Even if you’re approved for a balance transfer card, the credit limit you’re offered may not cover the full balance you want to transfer. If your balance is too big to transfer all at once, you’ll have to decide if it’s best to transfer a portion, apply for multiple cards or work with your existing creditors to get a lower interest rate.
- Do you have a repayment plan? It’s critical that you go into your balance transfer with a plan for how you’re going to pay off your debt and make the most of a card’s 0% introductory APR period or low ongoing APR. Otherwise, you may just find yourself back where you started. Additionally, if you don’t make timely payments, you could lose your 0% APR and may even trigger a penalty APR.
- What got you into debt? You may be motivated to pay off your debt, but if you haven’t addressed what caused you to get into debt in the first place, you may just use your new card to create an even bigger balance. What’s worse, you could end up stuck with a high interest rate on your new card once the promotional period ends.
- Good credit is required to qualify – To take advantage of the best balance transfer offers, you’ll need good to excellent credit. Instead of trying to do a balance transfer with bad credit, consider a debt consolidation loan or focus on paying down your balances as much as possible before you apply to rebuild your credit score and get better terms.
If you think a balance transfer credit card is the best way to tackle your debt, here are nine things you need to know before you apply.
See related: Balance transfers: How to come out ahead
Balance transfer facts
- Transferring debt isn’t the same as repaying
- Consolidating can simplify multiple payments
- You can transfer more than just credit card debt
- Fees are generally inevitable
- Special promotional transfer APRs and transfer fees do expire
- Be careful adding new debt to old debt with new purchases
- Learn how payments are allocated
- Multiple balance transfers can impact your credit score
- Balance transfers can take weeks to go through
1. Transferring debt isn’t the same as repaying.
It may feel great to move your debt from a high-interest card to a card with a long 0% introductory APR or a lower ongoing APR, but that’s just the first step. Since your balance has been transferred, not cleared, you’ll still have to work hard if you want to pay it off in a timely fashion.
That said, a balance transfer could save you a substantial amount of money. For example, if you were to pay 17% interest on a $2,000 debt making $48 minimum monthly payments, it would take more than five years to pay off the debt. Even worse, it would cost you more than $1,000 in interest.
On the other hand, if you paid a 3% balance transfer fee ($60) and transferred your $2,000 balance to a card that charges 0% interest for 15 months, you could pay off your debt in 15 months with payments of about $138 per month, saving yourself a substantial sum in interest charges.
“The only real, solid, definable benefit from a balance transfer is you can save money over the long haul if you pay back the previous amount you owed and you pay it at a lower interest rate, including all your costs,” says Mike Sullivan, director of education for Take Charge America, a Phoenix-based nonprofit consumer credit counseling company.
In other words, your debt doesn’t simply disappear when you do a balance transfer. In many ways, your work is only beginning.
Transferring a balance to a new credit card from one of the major issuers
- How to transfer a balance to an American Express credit card
- How to transfer a balance to a Bank of America credit card
- How to transfer a balance to a Capital One credit card
- How to transfer a balance to a Chase credit card
- How to transfer a balance to a Citi credit card
- How to transfer a balance to a Discover credit card
- How to transfer a balance to an HSBC credit card.
- How to transfer a balance to a U.S. Bank credit card
- How to transfer a balance to a Wells Fargo credit card
2. Consolidating can simplify multiple payments
Transferring balances to a single low-interest credit card can not only save you money and help you pay off debt, it can simplify your financial life.
If you’re carrying high balances on multiple high-interest credit cards and have a hard time keeping payment due dates and minimum payments straight, you may end up accruing late fees. In that case, putting all your credit card debts on one card can be a good move, since you’ll have just one card to keep track of and one payment to make each month.
3. You can transfer more than just credit card debt
Along with credit card balances, you may be able to transfer costly loans for cars, appliances, furniture and other monthly installment payments to a no-interest balance transfer credit card using balance transfer checks from the bank that issues the credit card.
See related: Can I transfer a loan balance to a credit card?
4. Fees are generally inevitable
Balance transfers can be a great way to save on interest and focus on paying down debt, but they come with a cost: You’ll almost always be charged a balance transfer fee, which is a percentage of the total amount you’re transferring. According to CreditCards.com research, the most typical balance transfer fee is 3%, but some cards charge 5%.
For example, if your issuer charges a balance transfer fee of 3% and you transfer a $10,000 debt from another card, $300 will immediately be added to your transferred balance, bringing the total amount you owe to $10,300.
There are a few credit cards with no balance transfer fee, but the tradeoff is usually a shorter 0% introductory APR period. While having a few extra months to make no-interest payments is attractive, if you have a plan to pay off your debt during in the introductory period, a card with a lower transfer fee is generally a better deal.
See related: How to negotiate a balance transfer fee
5. Promotional balance transfer APRs and transfer rates do expire
A balance transfer card may woo you with its super-low or 0% introductory APR offer, but don’t be fooled: That “teaser rate” doesn’t last forever. After a set period – often six months to a year or occasionally more – the interest rate will increase to its regular rate, which could be even worse than the one you were trying to escape.
If you don’t stick to a rigorous repayment plan to pay off your transferred balance before the teaser rate expires, or if you rack up even more debt on your new credit card, you could end up worse off than you started.
You also don’t want to waste time getting the balance transfer process started. Some cards offer a lower balance transfer fee if you transfer the balance within a set period. If you aren’t proactive, you could end up seeing your balance transfer fee increase, which could cost you hundreds.
6. Be careful adding new debt to old debt with new purchases
Just because the balance you transferred to the new card gets a free pass with perhaps a 0% interest rate right now doesn’t mean new purchases on the card will be interest-free, too. Also, having a $0 balance on the card you just cleared may tempt you to use it again. Don’t.
Some balance transfer credit cards’ rules specify that only transferred balances qualify for the lower rate, while new purchases collect interest at the regular, higher APR. Some cards do apply the introductory interest rate to new purchases, too, but adding more debt to your card’s balance will just make it that much more difficult to pay off. The purpose of applying for a lower-interest balance transfer card is to eliminate debt, so it doesn’t make sense to rack up more!
7. Learn how payments are allocated
To make matters more complicated, you can’t tell your card issuer how to apply your payments if you have both a 0% balance transfer balance and a new purchase balance at a higher rate on the same card.
According to the Credit CARD Act of 2009, issuers are required to apply any amount in excess of the minimum payment to the debt with the highest interest first. Most issuers will apply your total minimum amount payment to the lowest interest debt first, which will draw out the repayment time (and interest charges) on the higher interest debt.
Because of this, it may be best to avoid using a balance transfer card for any new purchases to avoid dual-interest-rate balances.
8. Multiple balance transfers can impact your credit score
You may think applying for a new balance transfer card when your teaser rate expires is the perfect solution to avoid ever paying interest on your credit card debt. While that can be done, know that multiple card applications that can damage your overall credit score.
When you continue to open new low-interest accounts, but maintain high debt levels, lenders may see you as a risk, which will make it hard for you to borrow money for big-ticket items such as a home or car, or even qualify for that second or third balance transfer card deal.
9. Balance transfers can take weeks to go through
Balance transfers are not instantaneous. Depending on the issuer and a number of other factors, your balance transfer could take as little as three days or as long as six weeks to complete. And while your credit card issuer should be able to give you a sense of how long it will take, there’s no way to know in advance exactly how long you’ll have to wait.
In the meantime, be sure to pay at least the minimum due to your existing creditors. Failing to do so could lead to late fees and damaged credit and could even disrupt the balance transfer in progress.
See related: Best balance transfer cards
Updated: December 24, 2019