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
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What is a balance transfer?
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 tactic will help apply more of your payments to the principal balance each month rather than interest charges, which can help you eliminate your card debt faster.
Here are the nine things you need to know before you make the big switch to a balance transfer credit card.
See related: How balance transfers impact your credit score
Balance transfer facts
- You’re transferring debt, not repaying.
- Consolidating can simplify multiple payments.
- You can transfer debts other than credit cards.
- Fees are generally inevitable.
- Special promotional transfer APRs do expire.
- Be careful adding new debt to old debt with new purchases.
- Learn how payments are allocated.
- Want to transfer again? Don’t bet on it.
- Good credit is required to qualify.
1. Transferring debt isn’t the same as repaying
When you use a balance transfer card, you are, in essence, paying off credit card “A” with new credit card “B.” For example, if you’ve been paying 17 percent interest on a $2,000 debt, you’d have to make a $48 minimum payment for more than five years to pay off the debt, paying more than $1,000 in interest. Transfer that $2,000 to a 0 percent card for 15 months with a 3 percent balance transfer fee ($60) making payments of about $138 during that 15-month period, you’ll save 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.
2. Consolidating can simplify multiple payments
Another reason to transfer balances to a single low-interest credit card is to simplify your financial life.
If you’re carrying high balances on multiple high-interest credit cards, and can’t keep those payment dates and minimum payments straight and often end up accruing late fees, putting all your credit card debts on one card can be a good move. You’ll have just one card to keep track of and one payment to make each month.
3. You may transfer debts other than just credit cards
It’s not just balances from other credit cards that can be transferred. You may be able to move 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.
4. Fees are generally inevitable
It isn’t quite generally free to make a swap from a high interest rate to a low interest rate balance transfer card. You will almost always be charged a balance transfer fee, which is a percentage of the total amount you’re transferring.
While there are a few cards on the market that forego the balance transfer fee, they typically offer shorter introductory periods. For those who already have a plan to pay back their debts on an abbreviated schedule, these cards can offer additional savings.
According to CreditCards.com research, the most-typical balance transfer fee is 3 percent, so if you transfer a $10,000 debt from another card, $300 will be added to your transferred balance right away. So do the math before you apply for a new balance transfer card to see if it makes financial sense to move forward by using a balance transfer calculator.
Transferring a balance to a card from one of U.S. major banks
- 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.
5. Special promotional balance transfer APRs do expire
A balance transfer card woos you with an extra-low annual percentage rate (APR), sometimes as low as 0 percent. That “teaser rate,” however, 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 interest rate you were trying to get away from.
Make a misstep, such as not sticking to a rigorous repayment plan to delete the balance before the teaser rate expires, or even adding new purchases to your new or old card, could set you up for failure in deleting your debt at a super low APR.
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 percent interest rate right now doesn’t mean new purchases on the card will be interest-free, too. Also, with a zero balance on the card you just cleared may be tempting 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 percent 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. Repeat transfer? Don’t bet on it
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. Good credit required to qualify
Zero interest balance transfer cards were widely available before the recession, but became rarer and less generous during recovery. They’re now common again, but the best terms are available only to those with good or excellent credit.
If you can qualify, and if it’ll save you significant cash or help you pay off your debt sooner, a balance transfer card deal is the way to go. If your credit is less than optimal, focus on paying down those balances as much as possible before you apply to rebuild your credit score.
Make sure to check out our list of the best balance transfer cards.
Updated: January 04, 2019