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.
If you’re dealing with pricey credit card debt, a balance transfer could be a useful tool in your debt reduction strategy. 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 0% APR on the transferred balance for a set period of time, usually six to 18 months.
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
Here are the steps you generally have to take when applying for a balance transfer with most major issuers:
- Apply for a card. You can apply for a balance transfer card online in a matter of minutes. You should look for a card with an introductory 0% APR offer on balance transfers, but to qualify you will need to have good or excellent credit.
- Initiate the balance transfer. 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 a payoff of the existing balance. Some issuers send payment to the original creditor, while others require you to pay using a furnished balance transfer check. Once the transfer goes through, you’ll make payments to your new creditor.
- Wait for the transfer to go through. 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.
- Pay down the balance. You can start paying the balance on your new card once the transfer is completed. If you are able to pay off your balance during the introductory 0% APR period, every penny will go towards the balance you owe considering there is no interest.
Which types of debt can be transferred
Most people consider balance transfer cards when they are trying to pay down high-interest credit card debt. However, that isn’t the only type of debt you can transfer to a balance transfer card. Here is a list of debts you can transfer to a credit card (varies by issuer):
- Credit card debt
- Auto loans
- Personal loans
- Student loans
- Home equity loans
How much debt can be transferred?
The simple answer is it depends. How much debt you can transfer from one account to another will vary by issuer. Typically, your credit card issuer is going to consider your credit history and income, among other factors.
There’s no way to know for certain how much you’ll be approved for ahead of time. But it’s important to note you’ll have to pay a balance transfer fee – usually 3% to 5% of the total amount transferred. If your approved credit limit is low, you might not be able to transfer your full balance.
Benefits and drawbacks of a balance transfer
Though the specific terms will vary by credit card or issuer, there are two major benefits to electing 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 can not only save you money and help you pay off debt, but 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.
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.
- Promotional balance transfer APRs and transfer rates 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, 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 paying interest on your credit card debt. While you can do that, 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.
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? As we previously mentioned, 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 might 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.
Balance transfer tips
If you are looking to consolidate your debts, you may as well save money while doing so. It is important to choose the right card that will help minimize your cost. However, here are a few other things to consider when completing a balance transfer:
- Is there a 0% APR offer? If you can move your debt over to a credit card with a 0% introductory APR offer, you will be paying your debt off interest-free. Keep in mind, the larger your debt, the longer you will want the intro offer to last.
- Is there a balance transfer fee? Your balance transfer card is most likely going to come with a small fee. And if your approved credit limit on your new balance transfer card is low, you may not be able to transfer your full balance.
- Are there rewards? You aren’t going to earn rewards on your balance transfer, but some rewards cards come with balance transfer intro offers. The only important thing to note here is once you pay off the debt you transferred to a credit card with a strong rewards game, you will continue to find benefits in your everyday expenses.
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.