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What is a balance transfer and how does it work?

Want to reduce the amount of interest you're paying? Consider a balance transfer card

Summary

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 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.

See related: Best balance transfer cards

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.

What kinds of balances can be transferred to a balance transfer credit card?

Most issuers won’t let you transfer a balance from another card of the same bank. This applies to both personal and business credit cards.

When you transfer a balance, you’re moving the amount you owe on one card to another card. The receiving card could be one you already have or a brand-new account that you open to take advantage of a low promotional rate.

Banks make money through a combination of interest and fees. For instance, you might pay a $95-plus annual fee for your card that the bank gets to collect each year. If you carry a balance at the regular APR, the bank also benefits from the interest you pay.

Which is why, in a nutshell, banks typically don’t allow you to transfer balances between cards at the same financial institution.

You can usually, however, transfer balances from multiple credit card accounts to a balance transfer card as long they have not been issued by the same bank.

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

How much debt can be transferred

The amount of debt you can transfer to a new or existing balance transfer card will vary from card to card and from issuer to issuer.

This amount will depend on several factors, including the credit limit on the balance transfer card, the available credit on that card at the time of the balance transfer, your creditworthiness, and any specific restrictions the issuer of the card might have on balance transfers.

Chase, for example, states in its terms and conditions that “the total amount of your request(s) including fees and interest charges cannot exceed your available credit or $15,000, whichever is lower … If your request(s) exceeds the amount that we approve, we may either decline the request or send less than the full amount requested to your designated payee.”

Some issuers won’t let you transfer a balance for the whole credit available on the card, even if at the time of the balance transfer the balance on the card is zero. Most issuers also will consider your credit and payment behavior to deny or approve the balance you’d like to transfer – even if this is lower than the credit limit on the card. If your payment history is stellar your chances to be approved for a balance transfer are higher.

Also, most issuers won’t allow you to know what credit limit they will grant you on a new balance transfer card in advance. You will have to apply for the card first. Once you have been approved the issuer will disclose the credit limit granted on the card.

How does a balance transfer hurt your credit?

A balance transfer can hurt your score by increasing your single-card utilization, lowering your length of credit history and adding a hard inquiry to your credit report.

At the same time, a balance transfer can also boost your score by increasing your overall card utilization, and it can help you pay off debt faster.

Also, consider that virtually every time you apply for a new credit account – including a balance transfer credit card – the lender will run a hard inquiry on one or more credit reports. Each new hard inquiry usually dings between five and 10 points off your credit score.

See related: Do balance transfers hurt your credit score?

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

  1. Transferring debt isn’t the same as repaying
  2. Consolidating can simplify multiple payments
  3. You can transfer more than just credit card debt
  4. Fees are generally inevitable
  5. Special promotional transfer APRs and transfer fees do expire
  6. Be careful adding new debt to old debt with new purchases
  7. Learn how payments are allocated
  8. Multiple balance transfers can impact your credit score
  9. 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.

See related: How credit card balance transfers affect your credit score

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 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!

See related: Can you transfer a store card balance to a credit card?

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.

See related: Multiple balance transfers: A difficult debt payoff strategy

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.

Bottom line

A balance transfer can be a useful tool to pay off credit card debt faster without incurring interest. But there are several things you need to consider to make a balance transfer work for you, including transfer fees and your payment and spending behaviors. Before starting a balance transfer make sure you have a repayment plan in place to ensure you will pay off the balance before the intro period ends. Also, avoid incurring more credit card debt – creating a budget to rein in your spending can help. Otherwise, the benefits of a balance transfer may be null.

Updated: February 27, 2020

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The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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