young male holding credit card

What Is A Balance Transfer, And How Does It Work?

Sarah Li Cain7-minute read
November 10, 2021

Paying down credit card debt can feel impossible, especially since interest rates tend to be quite high. Plus, if you’re only making minimum payments, you risk getting deeper into debt. That’s where a balance transfer comes in: you can use it to move your debt from a high-interest credit card to one with a lower rate so you can get some breathing room.

When done responsibly, a balance transfer is a smart move. Before signing up for a new credit card, you’ll want to learn about balance transfers and how they could impact your credit, and the consequences of falling behind on payments.

Balanced Transfers, Defined

A balance transfer occurs when you move the balance of one account to another — it’s common with credit cards. The point is that you can pay the entire balance at once and save on interest charges.

Doing so can also lead to lower monthly payments. For instance, if you transfer your balance to a card with a 0% introductory annual percentage rate (APR), you could potentially pay off the remainder of your debt interest-free.

How Do Balance Transfers Work?

Balance transfers will vary depending on the lender or credit card issuer. However, here are some general steps you’ll probably need to take:

1. Apply For A New Credit Card

You want to be able to apply for a credit card or take advantage of an existing offer with a lower interest rate. If you have excellent credit, you may be able to qualify for the most competitive offers — many credit card companies offer 0% APR introductory offers. Before signing up, check the fine print to make sure you know how much you can transfer, and whether there are any fees you need to pay.

2. Request A balance transfer

Make sure you have all the necessary information to do so, including the amount of debt you want to transfer and your other credit card details. In most cases, you can initiate the transfer by phone or online. You may be able to use checks your new issuer gives you, also called convenience checks. Some issuers may not count these as balance transfers, so check to make sure before using one.

3. Wait

Once your new card issuer approves your balance transfer, all you can do at this point is wait. It depends on the issuer, but the transfer could take at least 2 weeks. At this point, the issuer will pay off your old credit card account and you’ll be able to see your new balance (including any fees) on your new account.

4. Pay Your New Balance

You’re now no longer responsible for paying the balance to your old card, unless you continue to use it for new purchases. Instead you’ll be making payments to your new one. Make sure you know what your new minimum payment and due date will be — missing a payment could negatively impact your credit score and result in late payment fees.

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When Should I Use A Balance Transfer?

Using a balance transfer can be a smart idea if it can save you money. For instance, if you have a credit card with an 18% interest rate, and you can get one with a 0% introductory APR, transferring the entire balance to the new card could save you hundreds (or even thousands) of dollars in interest if you pay off the balance in full before the introductory period is over.

However, you’ll want to keep in mind that you’ll most likely need to pay balance transfer fees. In many cases, it’s worth it, but only if you’ll save more in interest. The fee is typically a percentage of the balance transfer amount.

For example, if your new credit card charges 5% and you want to transfer $5,000, you’ll need to pay $250. Meaning, this fee will be worth it if you believe you’ll save more than $250 in interest if you go through with the balance transfer.

Something else to be aware of is that if you’re conducting a credit card transfer with an introductory rate, you’ll need to make sure you can keep up with the minimum payments. Otherwise, you could forfeit the introductory rate and be forced to continue making payments at the regular APR — it could be much higher than you’d like. Ideally, you’ll also pay off the entire balance before the regular APR kicks in so you can save as much money on interest as possible.

Pros And Cons Of A Balance Transfer

Yes, balance transfers can save you a ton of money in interest, but it’s not the best move for everyone. Here are some pros and cons to consider when making your decision.

Pros

  • You can save money on interest: This major benefit is one of the main reasons people conduct balance transfers. If you can get a new credit card or loan with a significantly lower interest rate, you can save a ton of money in interest. If you qualify for a 0% introductory rate, you’ll save even more because you’re technically paying down the principal amount during that time.
  • You can consolidate debt: Depending on the amount of debt you have across your credit card balance, you may be able to transfer them all to one credit card with a much lower rate. Not only will that reduce the amount you pay in interest overall, it’ll help simplify your payments. That way, you’ll only have to make one payment instead of multiple each month.

Cons

  • You could pay a balance transfer fee: Many credit card issuers charge fees to transfer credit card balances, typically 3% to 5% of your balance transfer amount. This amount could add up and might not be worth it if you don’t save more than that in interest.
  • You’ll need excellent credit to qualify: Most credit cards offering low interest rates or even 0% introductory APR offers require cardholders to have excellent credit. If yours isn’t that great, you may not qualify for better cards.
  • You could add to your debt: If you haven’t dealt with why you’re in credit card debt in the first place, you could get into more debt with your new credit card. What’s more, some credit cards only offer low introductory rates for balance transfers and not purchases. If so, then you could be paying high interest rates for new purchases. Plus, if you don’t pay down the entire balance transfer by the end of the introductory period, you could find yourself deeper in debt.

What Should I Look For When Choosing A Balance Transfer Credit Card?

Since the main goal of a balance transfer is to help you save money, you’ll want to pick a card that helps you do so. Here’s what to keep in mind when shopping around for credit cards:

  • Low transfer fees: It’s extremely rare to find credit cards with no balance transfer fees, but there are ones that do offer low ones. Compare fees and calculate how much you could pay for each one when deciding on the best fit.
  • Low rates: The lower the rate, the less you’ll pay in interest. It’ll also give you more breathing room in your budget because your monthly payments could be lower. Ideally you’ll be able to qualify for a 0% introductory rate so you can worry about paying down the principal amount.
  • Lengthy introductory APR: The longer the low introductory period, the more time you pay to pay down your balance and save in interest each month. Many credit cards offer introductory periods from 12 – 18 months, and some even stretch to 24 months.

Tips For Completing A Balance Transfer

Here are a few tips on how you can successfully complete a balance transfer without breaking the bank:

  • Request the balance transfer within a certain time frame: some credit card issuers only allow balance transfers with the introductory rate within the first few months of account opening. Make sure you qualify by ensuring you have all you need to conduct the balance transfer well within that time.
  • Calculate and budget for fees: You’ll most likely have to pay a balance transfer fee, so calculate this amount well in advance. Whatever the number comes out to, make sure to budget for it so you’re not caught off guard.
  • Keep paying current card until transfer is complete: Even if your new credit card will pay off the old one, you might still be responsible for monthly payments before the balance transfer is complete. Make sure to check the payment due date of your current card and make the minimum payment to prevent getting a negative remark on your credit report.
  • Make a plan to pay off your balance: Once your balance transfer is complete, execute your plan to pay it down. If your new card gives you an introductory rate, see if you can pay off the entire balance before that period is over. During that time, work on other parts of your finances to ensure that you’re not getting into more debt.

Alternatives To A Balance Transfer

A balance transfer using a credit card may not be the answer for everyone. Instead, you can consider using a personal debt consolidation loan instead. Going this route may be the better choice if you have a high amount of debt and interest rates on personal loans tend to be lower than ones offered through regular credit card APRs.

For those who have enough equity in their homes, a home equity loan, home equity line of credit (HELOC) or a cash-out refinance are other options. The perk is that interest rates tend to be much lower compared to credit cards and you can consolidate higher amounts of debt. However, you’re putting your home on the line — if you miss payments, you could be at risk of losing your home.

The Bottom Line: Balance Transfers Can Help With Debt Consolidation And Saving On Interest

If you're wanting to pay off your credit card debt faster or are struggling with your payments, moving forward with a balance transfer might be a good idea. You’ll need to understand what your responsibilities are and budget accordingly for fees and new monthly payment amounts. When done correctly, you’ll finally be able to breathe easier and pay off your debt without stressing out more than you need to.

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    Sarah Li Cain

    Sarah Li Cain is a freelance personal finance, credit and real estate writer who works with Fintech startups and Fortune 500 financial services companies to educate consumers through her writing. She’s also a candidate for the Accredited Financial Counselor designation and the host of Beyond The Dollar, where she and her guests have deep and honest conversations on how money affects our well-being.