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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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Updated: April 9, 2020

If you’re dealing with pricey credit card debt, a balance transfer might be in order. A balance transfer is the process of moving high-interest debt from one or more credit cards to a credit card with a lower interest rate. A good balance transfer credit card can help you pay off debt faster, since more of your payments go toward the card’s principal balance each month instead of toward interest charges. It can also save you hundreds, if not thousands, of dollars in interest, given you’ll incur a low or even zero-percent annual percentage rate on the transferred balance for a set period of time, usually 6 to 18 months.

Balance transfers, however, aren’t free. Most issuers charge a balance transfer fee, and there’s other factors to consider before applying for a low or zero percent interest credit card. Here, we break down how balance transfers work and provide some tips on how to determine if this debt repayment strategy is right for you.

How balance transfers work

You generally apply for a balance transfer when you apply for a new credit card. You can also wait until after you’re approved for the card, though it’s best to get the process started as soon as possible. You’ll 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 your balance transfer, depending on your credit limit and the issuer’s transfer limits. After the transfer is approved, issuers facilitate pay off of the existing balance. Some send payment to the original creditor; others require you to pay using a furnished balance transfer check. Once the transfer goes through, you’ll make payments to your new creditor.

Balance transfers are not instantaneous. Depending on the issuer and a number of other factors, your balance transfer could take three days to 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 for the transfer. 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.

Which types of debts can I transfer to a credit card?

When you transfer a balance, you’re moving the amount you owe on one credit card to another credit 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. However, 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.

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

How much debt can be transferred?

The amount of debt you can transfer to a new or existing balance transfer credit card varies from card to card and from issuer to issuer. Generally, this amount depends 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.

Some issuers won’t let you transfer a balance for the whole credit limit available on the card, even if at the time of the balance transfer, the balance on the card is zero. 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.

Should you do a balance transfer?

A balance transfer can 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.

See related: How to improve your credit score

Benefits of a balance transfer

Though the specific terms will vary by credit card or issuer, there are two major benefits to electing for a balance transfer.

  • You can save money on interest. 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 $60 minimum monthly payments, it would take close to four years to pay off the debt. Even worse, it would cost you more than $700 in interest. (Our balance transfer calculator can help you determine how much you could save with a top balance transfer offer.)  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.
  • You can consolidate your debts. Transferring balances to a single low-interest credit card cannot only save you money and help you pay off debt, it can also 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.

Drawbacks to a balance transfer

As we mentioned earlier, balance transfers aren’t free. There are important terms and conditions to familiarize yourself with before applying for one. Here are some balance transfer drawbacks to be aware of:

  • Fees are almost 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. (Learn how to negotiate a balance transfer fee.)
  • 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. 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.
  • 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 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

Balance transfer tips

If you think a balance transfer credit card is the best way to tackle your debt, here are three things you need to know before you apply.

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. (Learn how APRs work.)

“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.

Avoid adding new debt to old debt with new purchases

Just because the balance you transferred to the new card gets an introductory 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?

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 an intro 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.

Takeaway

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 financial habits. Before starting a balance transfer, draw up a repayment plan to ensure you will pay off the balance before the introductory APR period ends. Also, avoid incurring more credit card debt. Otherwise, the benefits of a balance transfer may be null.

Transferring a balance to a new credit card from one of the major issuers

 

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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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