What Is a Balance Transfer Credit Card and How Do They Work
High-interest debt can feel like a death sentence. A balance transfer credit card gives you a fighting chance at paying down that debt without drowning in even more interest charges.
With a balance transfer credit card, you can transfer existing debt from other accounts, usually for a fee. Typically, balance transfer credit cards offer qualified borrowers a 0% APR introductory period during which they can pay down their outstanding debt without earning interest on the balance.
If your credit score is in decent shape, you may be able to qualify for a balance transfer credit card. But before you apply, make sure you understand the fees, rates and terms — and know what happens if you don’t pay off the full balance by the end of the promotional period.
What Is a Balance Transfer Credit Card?
A balance transfer credit card is a type of credit card that allows borrowers to move over existing high-interest debt from other accounts. The best balance transfer credit cards will offer an introductory period, typically between six and 21 months, during which borrowers can pay off the debt without accruing any more interest.
Credit card companies usually charge a balance transfer fee between 3% and 5% for this service, though you may be able to find a select number of cards that don’t charge a balance transfer fee.
In addition to balance transfer fees, you’ll also need to consider the regular interest rate that will kick in if you don’t pay off the total transferred balance by the end of the introductory period. If the post-intro APR is high and you haven’t paid down the debt, you could end up right back in the same debt situation you’re in now.
Finally, be aware of balance transfer credit card limits. Like traditional credit cards, balance transfer cards have a credit limit — a max amount of debt you can put on the card before you’re cut off, so to speak. If your existing debt is greater than the credit limit of the balance transfer credit card, you may not be able to move over all of your outstanding debt.
How Do Balance Transfer Credit Cards Work?
With a balance transfer, a credit card company will pay off your outstanding debt with your other lender(s), then transfer that debt to a new credit card issued in your name. You’ll then make monthly payments on the new card — typically without accruing more interest for a set number of months — in an effort to pay down the debt. This usually comes with a fee.
But what is the actual process of a balance transfer? Let’s break down how balance transfers work in five easy steps:
1. Assess Your Current Debt Situation
Before searching for a balance transfer credit card, it’s important to understand the rates of your current loans. While you should aim for a balance transfer card offering a 0% interest rate during an introductory period, you may not qualify. Even so, there could be a balance transfer credit card available with a lower rate than your current credit cards.
Now’s a good time to check your credit score as well. If your score isn’t strong enough to qualify for a balance transfer card, skip the application and come up with another plan. Applying for a credit card drops your credit score temporarily — even if you’re denied.
2. Choose the Right Card for You
The market is saturated with balance transfer credit card offers, but they’re not all the same. Find a card with the right mix of features and terms for your situation.
For example, if you have a lot of debt to transfer, it may be worth it to pay a higher balance transfer fee but get a longer 0% APR introductory period. Borrowers with less debt may want to prioritize lower fees or even simple credit card perks, like cell phone protection or cash back rewards, even if it means a shorter interest-free period.
Once you’ve settled on a card, apply. Some approvals can happen in a matter of seconds, but if your credit history is a little rockier, it could take more time to get your answer. Under federal law, credit card companies have 30 days to issue approval or denial.
3. Initiate the Balance Transfer
You can typically initiate a balance transfer online or over the phone. Whichever method you choose, you’ll need the account information and the amount of debt you want to move.
4. Wait for the Balance Transfer to Go Through
Balance transfers don’t happen immediately. It could take a few days — or even a few weeks — for the new credit card company to pay off your outstanding debts and add the debt to your new credit card.
Continue making scheduled payments on your old credit card or loan until you’re sure the balance has been transferred. A missed payment is a late payment.
5. Pay Down the Balance
Once the transfer is complete, start paying down the credit card balance. You can calculate how much you need to pay each month in order to have the total balance paid off before the introductory period ends.
For example, if you have $3,000 in credit card debt on your new card and 15 months of no interest charges, then you’ll need to pay $200 each month to pay off the outstanding credit card balance without accruing additional interest.
If you’re struggling to make big payments every month, make sure you at least pay the minimum monthly payment. Doing so helps you avoid late fees.
What Kinds of Debt Can I Balance Transfer?
When we think of balance transfer credit cards, we often envision moving over all our outstanding credit card debt — because that’s the most common use case. But depending on the balance transfer card issuer, you may be able to transfer other kinds of debt onto your new credit card, including:
- Personal loan debt
- Auto loan debt
- Student loan debt
You typically cannot transfer debt from the same credit card company. For example, if you have high-interest debt on a Chase credit card, Chase will not likely let you transfer that debt to one of its balance transfer credit cards.
Pros and Cons of Balance Transfers
Balance transfers can make a significant difference if you’re struggling with massive debt. But balance transfers themselves can do some harm to your financial wellness. Before opening a balance transfer credit card, consider the pros and cons.
- Zero interest
- Credit score improvement
- Simplified monthly payment
- Balance transfer fees
- Limited perks
- Short-lived intro period
Advantages to Balance Transfer Cards
Here are some of the advantages to taking out a balance transfer card.
The main reason to open a balance transfer credit card is the 0% APR introductory period. If you can pay off your outstanding debt during this period, you won’t have to worry about accruing additional interest. Because 100% of your monthly payment goes to paying down your debt, you’ll pay off the debt faster and save money on interest.
Credit Score Improvement
Balance transfers can be great for your credit score — if you keep up with the payments. When you transfer the debt from your old card to the new card, keep that old card open; just don’t use it. Keeping it open will decrease your credit utilization, which boosts your score. And by making on-time payments on the balance transfer card and reducing your overall debt, you’ll see further drops in your credit utilization — and thus further improvements to your credit score.
Simplified Monthly Payment
Some borrowers struggle with remembering multiple monthly payments across all their outstanding debts. By consolidating them onto a single balance transfer card, you’ll only have to worry about one minimum monthly payment. That means fewer chances for late fees and negative marks on your credit report.
Drawbacks to Balance Transfers
Here are some of the drawbacks to taking out a balance transfer card.
Balance Transfer Fees
Most credit card companies charge a balance transfer fee every time you transfer a balance over, usually between 3% and 5% of the total balance transfer amount. If you’re moving over a significant amount of money, the balance transfer fee can add a sizable chunk to the debt you have to repay. However, in most cases, the balance transfer fee will be less than what you’d accrue in interest on your old credit card in just a few short months.
If you have fair to good credit but need a balance transfer credit card to pay down debt, you could be missing out on better credit card offers. With a score in the mid to high 600s, you may even be able to qualify for a basic cash back credit card or travel credit card. Balance transfer cards can help you take control of your debt — but most don’t offer perks and rewards comparable to cash back and travel credit cards.
Short-Lived Intro Period
Not all balance transfer cards are created equal. While some may offer a no-interest repayment period of nearly two years, others might only offer six months without an interest rate (or none at all). If you struggle to pay off the debt during the introductory period, your remaining balance will accrue interest charges. This might land you right back where you started, only now you’ve had to pay a sizable balance transfer fee as well.
When Is a Balance Transfer a Good Idea?
If you’re struggling with high-interest credit card debt and have trouble keeping your payment dates straight, a balance transfer may be a good idea. In general, consider a balance transfer if:
- You have several high-interest credit accounts. Credit card and personal loan interest rates can be high. If you’re stuck paying on a high-interest loan but could qualify for a balance transfer credit card, you’ll likely save money by transferring the money over to a new card — even with the typical transfer fee.
- You miss payments easily. Even if your current credit card interest rates aren’t terrible, having multiple payment dates every month can be overwhelming and make it easier to miss a payment. A balance transfer credit card allows you to consolidate your debt and make one easy payment every month.
Alternatives to a Balance Transfer Credit Card
Balance transfer credit cards offer a unique opportunity for people to pay down their debt without worrying about predatory interest rates. But what if your credit score isn’t strong enough to qualify for a balance transfer credit card — or what if your only options are cards without a 0% intro APR?
You’re not out of options. Here are some common alternatives to a balance transfer credit card:
Debt Consolidation Loan
A debt consolidation loan is a type of personal loan, and its purpose is — you guessed it — consolidating your debt. You won’t be able to find personal loans with 0% interest, but you may be able to secure a debt consolidation with a lower interest rate than some of your higher-interest accounts.
Getting a debt consolidation loan with bad credit is possible, but you should be prepared for an interest rate as high as 20%. Still, if you’re juggling multiple credit cards with APRs that are nearly double, a debt consolidation loan could save you money and make paying down your debt more manageable.
Friends and Family
Borrowing money from loved ones isn’t easy, but if it keeps you from drowning in mountains of credit card debt, it’s worth asking. Approach the conversation delicately, and make sure your friends and family know that you understand if they say no.
If a loved one does loan you money, don’t take advantage of it. Work hard to pay them back just as you would any other loan with an official lender.
Your Current Credit Card Issuer
If you’re having trouble qualifying for a good balance transfer credit card with a 0% intro APR, ask your current card issuer what options they have. If you have a history of on-time payments, you may be able to get them to lower your interest rate.
If your credit card issuer believes you’re about to transfer your debt to another credit card company via balance transfer, they may be more open to lowering your rate to keep you as a customer.
Debt Management Program
If you can’t qualify for a balance transfer credit card or a debt consolidation loan, it may be worth working with an agency on a debt management plan (DMP). Such agencies, accredited by the Financial Counseling Association of America (FCAA) or National Foundation for Credit Counseling (NFCC), make all your monthly payments on your behalf — and you instead make one single payment to them.
Using a DMP may result in a mark on your credit report. But the small mark on your report will have far less effect on your credit score than even one late monthly payment.
For a fee, you can work with a credit counselor to reign in your debt. A credit counselor may even help you get set up with a DMP.
Debt settlement and filing for bankruptcy are more extreme solutions — and should only be a last resort.
Contributor Timothy Moore is a writer and editor in Cincinnati who covers banks, loans, insurance, travel and automotive topics for The Penny Hoarder.