What Is a Balance Transfer and How Does It Work?
Some 8 in 10 American adults have at least one credit card, according to the Government Accountability Office, and their debt has now surpassed $1.1 trillion.
A balance transfer — moving existing credit card debt from one card to another — is a popular way to manage this kind of debt. This is typically done to take advantage of a lower interest rate as many specialized balance transfer cards offer an introductory period with no interest charges on transfers (and often on purchases, too).
Read on to learn more about balance transfers, common pitfalls with this strategy and how to determine if it’s the right move for you.
How do balance transfers work?
When you carry out a balance transfer, the new card issuer essentially pays off the debt to your previous issuer. You’ll then owe the new lender the balance you transferred, which is now subject to the new card’s terms and conditions, including the payment due date and annual percentage rate (APR). A balance transfer fee will also be added to your transferred balance, usually between 3% to 5% of the total (or a minimum of $5 to $10, depending on the amount). Most credit cards charge this fee, although some might lower the fee, or not charge it at all, during a specified period of time — usually for transfers made within the first three months of account opening.
It’s important to note that you can’t transfer a balance between cards issued by the same credit card company. For example, you wouldn’t be able to transfer a balance from a Chase Freedom Unlimited® Credit Card to a new Chase Freedom Flex® Credit Card.
What is a balance transfer credit card?
A balance transfer credit card is a regular credit card with specific features and benefits related to balance transfers. The most common — and arguably most attractive — feature is a 0% introductory APR on balance transfers during a given time period. Some cards might offer a lower balance transfer fee — or waive it completely — as well as a low regular APR that kicks in after the intro APR.
It’s important to note, however, that credit cards with this kind of balance transfer offer are meant for people with good to excellent credit. If your current credit is fair or poor, it might be better to look for debt consolidation loans with easier credit requirements. Or if you’re already behind on payments, you may want to consider whether debt relief, where you negotiate with creditors to accept a settlement that’s less than you owe, makes more sense for your situation.
Should you do a balance transfer?
Assuming your credit score is high enough to qualify, a balance transfer credit card can be a great tool if you owe a relatively small balance. You can save a significant amount of money on interest, consolidate your debt under a single monthly payment and potentially pay off your debt faster.
But that’s only if you have the income and discipline to stick with a repayment plan that allows you to pay off most or all of the balance before the promotional period ends. Before getting a balance transfer credit card, calculate how much you’d have to pay each month to settle the debt within the promotional period and map out your budget to see if you can afford that amount.
Your plan to pay off the debt is critical, because after the 0% APR period is over, the balance will start accruing regular interest. The regular APR of your new balance transfer card could be even higher than your previous card's, which means a balance transfer could end up costing you more money if you don’t pay down enough of your debt in time.
Another common pitfall with balance transfer cards is that they can make it easier to fall further into debt, since you’re increasing your credit limit by opening a new account. That’s why it’s best to avoid using the balance transfer credit card for new purchases while you’re paying down your balance. Some cards may include new purchases in the 0% APR, but many do not. Even if they are included in the promotional rate, if you don’t pay off the purchases immediately, you’ll be adding to your debt and making it harder to pay off the transferred sum in time.
Once you’ve paid off the balance transfer amount, you’ll still need to be careful with your spending. It can be easy for charges to pile up, and if you start to carry a balance on your new credit card each month, you can wind up back at square one with unmanageable credit card debt.
If those caveats sound offputting, you may want to consider alternatives ways to get rid of credit card debt, including using the debt snowball or avalanche method, consolidating with a personal loan or home equity loan or negotiating with your creditors for a debt settlement. The option that is best for you depends on several factors: how much you owe, your ability to get approved for a new credit card or loan, your repayment plan and, of course, personal preference.
How to do a balance transfer
Balance transfers are relatively simple to set up, especially on credit card companies’ websites and mobile apps. A balance transfer normally takes between seven to 14 business days to be completed.
Keep in mind that during the process, you might see the balance on both credit cards simultaneously, and this duplicate amount can even show up on your credit report. However, this is only temporary and shouldn’t actually affect your credit score later on.
Here are the steps to follow:
Choose a balance transfer card
If you own more than one credit card, you may be able to use an existing card to carry out a balance transfer, as many credit cards offer this service. But you’ll want to compare the terms your existing cards offer with the terms you could qualify for by opening a new card with a specialized balance transfer offer.
The best choice will depend on the amount of debt you’re carrying and your repayment plan, your credit score and credit history. Credit cards that focus on balance transfers typically have interest-free promotional periods of up to 21 months, but don’t offer many benefits beyond that.
Other credit cards might have shorter introductory periods of 12 to 15 months, but offer additional perks like insurance coverage and cash back rewards.
For more advice on picking a card, see our best balance transfer cards list, which features some of the top 0% APR offers on balance transfers, new purchases and more.
Determine the transfer amount
You can generally transfer any amount from one card to another, though the new card’s credit limit and the balance transfer fee amount could limit the total you’re able to transfer.
For instance, if your new card has a $2,000 limit and a 5% balance transfer fee, you’ll be able to transfer only $1,900 since a $95 fee will be added to the balance.
If the balance you want to transfer goes beyond the credit limit you were approved for, you’ll need to consider alternatives, such as a personal loan for debt consolidation. Or come up with a new repayment plan to get rid of the interest-accruing balances left on your old card.
Initiate transfer
To initiate a balance transfer, all you need to do is log into your new card’s issuer platform and look for the “balance transfer” option. (It could also be named “transfer a balance” or “make a transfer.”)
You can also initiate a balance transfer by phone, by mailing a form, or by visiting a brick-and-mortar bank branch.
In all of these cases, you’ll need to provide the old card’s account number, expiration date and the card verification value (or CVV) number, as well as the amount you wish to transfer. After that, it’s up to the issuer to take care of; you’ll be informed once the transfer is approved and completed.
Pay off the debt
Once you can see the new balance on the receiving card, it’s time to carry out your repayment plan. Again, you’ll want to be sure your repayment plan calls for paying off most — if not all — of the debt you transferred during the 0% interest period to get the biggest benefit.
How does a balance transfer affect your credit score?
Anytime you apply for a new credit card, a hard inquiry will be reflected on your credit report, which can slightly decrease your score for a short time period.
On the other hand, there are positive effects that can outweigh this drawback. A new credit card increases your available credit, which will very likely reduce your credit utilization ratio and lead to a better credit score.
As for the old credit card, it’s wise to keep the account open since it increases your amount of available credit and may help maintain your credit age — both of which are important factors that impact your score. (The exception is if the card charges you an annual fee.) That said, it's best not to use it at all or use it sparingly to avoid incurring more debt while you pay off the existing balance.
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