What Is a Balance Transfer, and Should I Do One?

Photo to accompany story about what a balance transfer is. Getty Images
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Americans have been cutting their credit card debt this year. While a recession created by the coronavirus pandemic began to sweep the country, the average credit card balance in the U.S. dropped: from January to May of this year, according to credit bureau Experian, it fell by 14% to $5,338.

That’s still a sizable amount, though — and one of the tools you can use to manage a large credit card debt is a balance transfer credit card. 

In the simplest of terms, a balance transfer allows credit card holders to roll over their debt from one card to another, usually at better terms. Credit cards designed for balance transfers often offer a low introductory interest, or even a 0% Annual Percentage Rate, on transferred debt for a limited time. That allows people who do a balance transfer to catch up on their payments, without having to worry about interest. 

“The most significant advantage of using a balance transfer is the 0% interest rate period,” says Leslie Tayne, a debt attorney who founded Tayne Law Group in New York. “As a result, you should be able to pay off your debt more quickly because all of your payments are going directly to the principal.”

Credit card debt isn’t the only balance due that can be rolled over to a low-interest card. It’s possible to roll over student loans and personal loans to certain credit cards. But is it the right move to get control over your finances? 

While balance transfer credit cards offer hope, they also present risk if you don’t have a plan to pay off that balance during the introductory period. 

Before you start shopping around, it’s critical to make a plan to manage and pay down what you owe. 

How Do Balance Transfers Work?

Balance transfers are initiated when a cardholder asks to move all or part of the debt from a loan or other credit card to a balance transfer card.

Although it sounds simple, the workings of balance transfers can be complex based on bank policies and the fine print on your credit card agreement. If you have two credit cards with the same bank, they often won’t let you consolidate all your debt on one credit card. 

Balance transfers also come with fees, usually between 2% and 5% of the amount transferred, depending on the card. These fees will be added to your balance on the new card. For example: if you are transferring $2,500 from one card to another, and your transfer card charges a 4% fee, your new balance will be $2,600 — $2,500 from the original balance and an additional $100 in fees. 

In addition, balance transfers are not an instantaneous process. While some are complete in a matter of days, others can take up to 21 days to complete. During that time, you’re responsible for making payments on the old credit card until the transfer is complete. 

If everything goes well, a balance transfer can offer a relatively easy way to reduce how much you pay in interest on your credit card debt, and ultimately get you out of that debt faster. To make this work, it’s key to find the right balance transfer credit card. 

Balance Transfer Credit Cards 

Balance transfer credit cards fall in a category of their own. Like other cards, they can be used for everyday spending, but instead of offering travel rewards or cash back, they offer a 0% interest promotional offer, meaning you won’t pay any interest on the rolled over debt for a period of time, such as 12 or 20 months.

While you can transfer balances between most credit cards, it’s important to pick a balance transfer credit card with a 0% interest rate to pay off that debt faster. Because credit cards have an average interest rate of 14.52%, according to the Federal Reserve, moving debt to a balance transfer credit card can save hundreds on your payments each month. 

However, as the economy has contracted and lenders have become more careful, getting approved for a balance transfer card has become tougher. Before shopping around and filling out an application, you should check your credit score to make sure you will qualify. If your credit score is below 700, you may not qualify for a new credit card. 

Who Should Do a Balance Transfer?

Before considering a balance transfer, it’s crucial to take a realistic look at your spending habits to determine if it’s the right move for your lifestyle. Moving around debt can free up space on other cards, which could come with the temptation to spend even more. 

“Not understanding how balance transfers work can bring someone into a vicious debt cycle within just months,” says Nami Baral, founder of personal finance platform Harvest. “The fine print can be reduced to the simplest concept to avoid danger: ensure your credit card spending does not exceed your cash inflows.” 

If you have the discipline to go into a balance transfer, the next step is to determine how much money you could save by rolling over debt to a 0% promotional rate. Let’s say you currently have $5,000 on a credit card at 16% interest. To pay off that debt in 12 months, you would have to make monthly payments of $460 per month, accounting for interest.  

If you moved that over to a balance transfer credit card with 0% interest for 12 months with a 3% transfer fee, your new balance would be $5,150. To pay it off in 12 months, your minimum payment would be around $429 per month. Over the span of the year, not only would you have that debt erased, but you would save around $370 in payments. 

Original BalanceInterest due (over 12 months)Balance transfer feeMonthly payment required to be debt-free in 12 monthsTotal amount paid
Regular Credit Card$5,000$520n/a$460$5,520
Balance Transfer Credit Card$5,000$0$150$429$5,150

Finally, it’s key to have a plan to pay down that debt during the allotted promotional period. If you don’t pay off the debt during that period, the interest rate on any remaining balance will jump to the credit card’s regular rate, starting the cycle of debt all over again. 

Costs and Fees Associated With Balance Transfers 

Balance transfers are not free. Just as banks make money on interest charged to credit card balances, they also make money on moving debt from one card to another. Although it may not sound like much, the fees can pile hundreds of dollars onto your transferred balance. 

Pro Tip

Only use a balance transfer card if you know you can pay the entire balance during the 0% introductory period. Otherwise, you’ll be hit with a high new interest rate.

There’s also serious costs associated with not paying off the debt. Along with applying the current interest rate to any debt leftover from your balance transfer, some credit cards will charge retroactive interest if you can’t pay off the entire debt on time. That means if you were close to paying off the balance but can’t get it over the finish line, the retroactive accrued interest will send you back to square one. 

If you’re late on a payment, you could face a similar setback. Certain cards require that you make payments on your balance transfer credit card on time throughout the promotion. If you fall behind on even one payment, the entire balance could be subject to cancelling the promotion, and charging the current interest rate on your moved debt. Before applying, be sure to read all the fine print to make sure you understand which situations could cancel the 0% interest promotion. 

And if you like collecting reward points, frequent flyer miles or cashback on your credit card spending, be aware that you are not likely to earn a bonus on your balance transfer. Balance transfers to a rewards card almost never qualify to earn any kind of bonus.

The Effect on Your Credit of Balance Transfers

Aside from the requisite credit check that comes with applying for any new credit card, and which results in a temporary hit to your credit score, moving debt around can also have an effect on your overall credit report. For instance, getting approved for a new card gives you more available credit, which can raise your credit score.

You must however have good or excellent credit to get approved. A denied application not only hurts your credit score, but also may require you to look for another way to pay down your debt. 

Closing the card you transferred from can also hurt your credit score. 

“There is nothing stopping you from continuing to charge on the card you transferred from,” says Tayne. “But closing that account could hurt your credit score because it will decrease the length of your credit history and increase your credit utilization.”

Like every financial decision you make, applying for a balance transfer credit card should not be taken lightly. Instead, understanding how a new application will affect your credit score and making a plan for your remaining credit can prevent a decrease in your credit score. 

Alternatives to Balance Transfers 

Balance transfers aren’t for everyone — and that’s okay. If you don’t trust yourself to stop spending on credit cards, or don’t have a plan to pay off the transferred debt during the 0% introductory period, it may not be worth the trouble of applying for a balance transfer card. There are still options available that can help you pay off debt on your terms. 

One such option is the personal loan, which has gained popularity over the last 10 years for debt consolidation. Banks, credit unions, and online lenders offer personal loans at a variety of interest rates and terms to fit all lifestyles. For those who are looking to roll all their credit cards into one monthly payment, without adding a way to spend more, a personal loan might be the right fit. 

Another idea is to create a strategy to pay down your current credit cards. By understanding the most common ways to knock down debt using your current budget, you can start chipping away without worrying about being approved for a new card or personal loan. 

As you set your plans, be sure to stay away from credit repair companies. Instead of helping you make a plan to pay down credit cards or negotiate settlements with debtors, most only review your credit report and dispute negative items for a fee. With free access to your credit report, you can do the same work at only the cost of time. 

Bottom Line

Balance transfer credit cards can provide a lot of relief for those struggling with debt. But they can only do so if you have the discipline to not rack up new debt on old cards, and pay off the debt you transferred before the promotional period ends. 

Before you think about applying for a balance transfer credit card, start by taking stock of your personal situation. If you already have great credit and can budget around the payments necessary to eliminate your debt, then a balance transfer card could be exactly what you need to help you get ahead.