How To Do a Balance Transfer & Why It Works

By moving your debt to a card with a lower interest rate, you could be saving yourself a bigger headache down the road
10 minute read | 2/1/19Feb. 1, 2019

When you’ve got high-interest debt, it’s tough to feel like you’re getting ahead. After all, each payment you make goes mostly to paying interest charges — instead of actually reducing your debt. If you’re one of the Americans with a share of $844 billion in credit card debt, the whole situation can start to feel hopeless.

One way to combat your credit card debt is to use a balance transfer card. Balance transfer credit cards offer you the opportunity to put more of your money toward reducing your debts and getting out of trouble faster.

What Is a Balance Transfer?

With a balance transfer, you open a new credit card account and then transfer your existing balances to the new card. Basically, you use your new, lower-rate credit card to pay off your high-rate balances. Sometimes, balance transfers are referred to as credit card refinancing.

What Balances Can Be Transferred?

For the most part, most other credit card balances can be transferred. Double-check the terms, though. Sometimes an issuer won’t let you transfer a balance to another card they issue. For example, if you have a card issued by Chase, and then open a new Chase account with a different credit card, you might not be able to move your old balance over. Issuers usually want to bring balances from other creditors — not reduce what they’re making off you.

Some credit cards will allow you to transfer small personal loans and other unsecured debt, like payday loans, but you should read the terms before you move forward. This isn’t always possible.

Additionally, there are some credit issuers that will actually let you transfer student loans, business loans, and even mortgages to your credit card. Check with the issuer to find out what types of debt are eligible.

How Do Balance Transfers Work?

It’s pretty straightforward. You move your debt to a card with a lower interest rate, more of your payment goes toward reducing your debt, and you pay off your obligation a little faster — and you pay less in interest.

However, there are still a couple of things you should keep in mind before transferring your balance.

What Are Introductory APR Periods?

A lot of the time, with a balance transfer, you’ll get an introductory APR. For those with the best credit, this is usually a 0% APR. With a 0% APR balance transfer, the entire amount of your payment goes toward reducing your debt. This is a great way to supercharge your debt repayment plan.

Even if you don’t get a 0% APR, some introductory rates are still fairly low, usually around 2% or 3%. This is still a good deal and can go a long way toward helping you get rid of your credit card debt — even if your credit isn't so great.

Many credit cards have introductory APRs that last anywhere from six to 24 months. On average, though, it’s common to see introductory periods that are 12 or 18 months long. Once the intro period is over, though, the interest rate on the card skyrockets to the card’s regular rate.

The best practice is to develop a plan to pay off your debt during the intro period. However, even if you don’t get all the debt paid off, you might still come out ahead, since you’ll be able to significantly reduce your balance before the higher rate kicks in.

Do Balance Transfers Hurt Your Credit?

In most cases, balance transfers are unlikely to hurt your credit score very much. You might see a small initial drop when you apply for the credit card, and the new credit line can cost you a point or two, but for the most part, you’re not going to see a huge impact.

With your old credit cards paid off, your credit utilization is likely to improve. It’s true that maxing out the credit line on your new card with a transfer can have a somewhat negative impact. However, as you make your payments, this will be less important, and on-time payments will be good for your score.

As long as you make your minimum payments on time and in full, you should actually see an improvement in your credit score over time.

Balance Transfer Fees

There’s a good chance that you’ll pay a balance transfer fee when you use this strategy. It’s common to see a minimum balance transfer fee of $10, with the actual fee being 3% to 5% of the amount transferred.

For example, if you had a balance of $300 and the balance transfer fee is 3%, it comes out to $9. However, the minimum fee is $10, so you still have to pay the higher amount. On the other hand, maybe you transfer $700. If the fee is 3%, you’ll pay $21. Read the fine print to discover what it’s going to cost you to transfer the balance.

In most cases, you want to make sure your interest savings will be enough to overcome the balance transfer. For larger balances, especially if you know it will take you longer to pay them off, paying the fee can be a fair exchange. The interest savings over 18 or 24 months — especially if you can get a 0% APR credit card — can more than make up for a balance transfer fee.

When Are Balance Transfers a Good Idea?

If you’re tired of making high-interest credit payments and wish more of your payment went toward actually reducing what you owe, a balance transfer can be a good strategy.

However, it’s important to understand that you’ll get the best deal when you have good credit. If you have excellent credit, you’re more likely to get a 0% APR deal — with a longer introductory period. If you have debt that you can pay off within two years, and you can save on interest by getting the best deal, it makes sense.

Even if you can’t get a 0% APR or the longest intro period, it might still be worth it to do a balance transfer. Run the numbers to see whether you would come out ahead. Don’t forget to factor in balance transfer fees.

The biggest issue you have to worry about when you use a balance transfer is that it’s easy to rack up new debt. When you pay off your other credit cards, it frees up space for more spending. It’s tempting to view that money as yours, and spend even more. As a result, you could end up in even more debt.

Another concern is that you might spend on your new card as well. A balance transfer is most effective when you stop overspending and you focus on paying down your debt.

If you have poor credit, your debts are too high to be paid off using a credit card, or you’re not sure you’ll be able to qualify for a balance transfer for some other reason, you might need to turn to other strategies for tackling your debt. Consider credit counseling or some form of debt consolidation if a balance transfer isn’t going to work for you.

How to Choose the Best Balance Transfer Card for You

Getting the right balance transfer card is mostly about figuring out your end goal. Start by deciding how quickly you think you can pay down your debt. Look for a card that has an introductory period that is likely to last long enough for you to get rid of your debt — or at least make a sizeable dent.

Other factors to look at as you compare different card offers include:

  • Promotional APR. The lower the APR, the better. However, if you can get a 0% APR for six months, and a 2% APR for 18 months, you might be better off with the longer intro period. Run the numbers to see what works best for your situation.
  • Balance transfer fee. Your best option is a card with no balance transfer fee. However, if you can get the same benefits with a 3% fee instead of 5%, go with the lower fee, all things being equal.
  • Who has your current debt. Take into account the issuer. You might not be able to transfer between cards with the same issuer, so look at where the debt is coming from and plan accordingly.

You can use an online calculator to estimate the impact different cards will have on your debt. Get the card that will get you the furthest along in demolishing your debt.

How To Do a Balance Transfer

Once you decide that a balance transfer is the right choice for your situation, there are certain steps to follow to get the most out of your balance transfer.

1. Decide where your balance should be transferred

Choose the right card for your balance transfer. In some cases, this might be a new card. You can also transfer your balance to an old card with a lower interest rate. An older card you have might be offering a special deal, and you can take advantage of it.

2. Figure out how much credit you have available

Next, find out how much credit you have available on the card. Verify your credit limit on a new card and double-check your available space on an old card.

Make sure you have enough room on the card to transfer your desired balances. If you don’t have room to move everything over, determine which debts would be most beneficial to move. In general, you want to move the highest-rate debt over.

3. Find out if there are balance transfer limits

Even if you have enough available credit on your card, your issuer might limit the balance transfer amount. Review the terms and conditions to ensure that you’ll be able to transfer the amount you plan.

4. Double-check the fine print for terms and conditions

Don’t just review the terms regarding the transfer. Make sure you understand all the other conditions that come with the card. Some items to watch for include:

  • Verify that you really do get the 0% APR deal. Sometimes, what you apply for and what you end up with, following a credit inquiry, are two different things.
  • Find out what the interest rate will be following the end of the intro period. If it’s high, you need to do your best to get rid of the debt before the end of the intro period.
  • Look at the purchase APR. Sometimes, the balance transfer rate is different than the purchase rate. If you make purchases, you might end up paying the higher APR on those than you do on the balance transfer. Be aware of that before you move forward.
  • Check to see if interest will be applied retroactively. In some cases, if you don’t pay off the balance transfer by the end of the intro period, all the interest you would have been charged since the date of opening your account is added to your balance. Avoid cards that have this policy unless you’re absolutely certain you’ll pay off the balance in time.
  • Make sure you know what time frame you have to complete the transfers. In many cases, you need to transfer balances within 60 days of opening your account in order to get the deal. Double-check this time frame to make sure you don’t miss the window of opportunity.
  • Take into account balance transfer fees and other items. You might be surprised at what could restrict you — and turn bad for your finances.

5. Collect information from your other accounts

Next, get the account numbers and balance information from the accounts you want to transfer. You might also need the payment addresses for the other accounts. All of this information will be used by your new credit card issuer to pay off the debt.

6. Initiate the balance transfer

Now you’re ready to begin the balance transfer. The transfer will be initiated from your new credit card. You might be able to fill in the necessary information on your new credit card issuer’s website. In some cases, you might have to call.

If you’re using an existing account for your balance transfer, you might have been sent checks. In that case, it’s easy to simply write a check for the desired amount and send it to your older creditors, just like you would any other payment.

7. Pay off your debt

Once your balance transfer is initiated, it's time to get started paying down the debt you owe. If you're able to, make payments as often as possible in order to pay down the balance as quickly as possible. Not only will you get out of debt faster, but you'll also likely see a boost in your credit score. 

Tips for Successfully Using a Balance Transfer Card to Pay Off Debt

Now that you’re working on paying down your high-interest debt with a balance transfer card, you need to make sure that you’re getting the best use of your resources.

Here are some things you can do to increase your chances of success.

  • Make a payoff plan. Have a plan to get rid of your debt, preferably before the end of the intro period. If you have $4,000 in credit card debt, and you have an intro period of 18 months, you need to pay $222.22 each month to complete your goal.
  • Use automatic payments. To make sure you stay on track, set up automatic payments from your checking account.
  • Keep your old accounts open. Closing your old accounts can negatively impact your credit score. Keep them open to help maintain your credit score.
  • Don’t rack up new debt. Don’t use your new card to make purchases. Additionally, don’t use your old cards. If you use them, only spend small amounts you can pay off within your budget.
  • Stick to a spending plan. In order to truly be successful with any debt paydown plan, you need to attack the habits that got you into debt in the first place. Make a spending plan and stick to it so you don’t end up in debt later.

Once you have your debt paid off, you’ll feel a great sense of relief. As long as you continue living within your means and build up your emergency fund, you shouldn’t need to get into more debt later.

Example Scenario

Let’s say you have debt amounting to $3,500 at 18.9% and you only pay the minimum payment. Plugging those numbers into a minimum payment calculator, it will take you 123 months (a little more than 10 years) and will cost you $5,634.96 total — that’s $2,134.96 in interest.

Now, with a 0% APR balance transfer, you could make payments of about $194.44 per month and be done in 18 months. And, of course, you’d save all that money in interest. Even if you paid a balance transfer fee of 5% ($175), you’d come out ahead. You’d have to pay $204.16 each month as a result of the fee, but it would still be worth the savings in interest.

Even if you ended up with a 3.99% APR and a 5% balance transfer fee, you’d still come out ahead. You’d pay $209 a month and be on the hook for $87 in interest.

Let’s say, though, that you can only afford to pay $150 per month. As long as your credit card doesn’t retroactively apply interest, you could still come out ahead. With a 0% APR credit card balance transfer, you’d pay off $2,700 during the 18-month introductory period, leaving $800. Let’s say your new regular APR is 17%. If you stick with the $150 per month, you’ll finish six months later and pay $37 in interest.

Bottom Line

If you approach your credit card balance transfer with a plan, you should be able to move your debt, tackle it aggressively, and save money while you get out of debt faster.

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