How a Balance Transfer Credit Card Can Get You Out of Debt
Many families struggle just to manage minimum payments while incurring even more debt from predatory interest rates — the average annual percentage rate (APR) for new credit cards surpassed 18% in 2022.
In short, credit card debt can be debilitating. While there are several options available to those struggling (the debt avalanche and debt snowball methods, personal loans and even debt settlement), one of the easiest and most manageable — when done right — is a credit card balance transfer: taking outstanding debt from one or more cards and shifting it all onto one (more manageable) credit card.
What Is a Balance Transfer Credit Card?
Balance transfer credit cards are normal credit cards with a balance transfer perk. A card with a balance transfer option allows you to move a balance — or multiple balances — from one card to another.
It doesn’t matter if you move balances from Visa to Discover or from a store credit card to a new Mastercard. However you usually can’t transfer balances between two cards issued by the same company, such as moving a balance from a Chase Freedom card to a Chase Sapphire Preferred card.
Qualifying balance transfers generally come with lower introductory interest rates for a set amount of time. The rates then rise to a higher APR after the promotional period ends.
What to Look for in a Balance Transfer Credit Card
Fine print matters. If you’re considering a credit card balance transfer, explore the fees (don’t forget to check the annual fee), the duration of the offer and interest options of the card you’re considering before making the jump. You’ll also want to make sure the new card offers a higher credit limit and that you have a strong enough score to be approved.
Balance Transfers: At a Glance
Balance transfer fees
Typically from 3% to 5%
Look for 0% intro APR
Duration of Promotion
Usually 12-18 months
At least 690 (FICO)
Larger than current
You will incur a fee when you transfer a balance to another card. These balance transfer fees vary based on the amount you transfer.
Beware of balance transfer offers for credit cards that have an annual fee, which can run into the hundreds of dollars. Research competing offers to ensure the card’s benefits are worth the fee.
Typically, you’ll be charged a $5 to $10 balance transfer fee. For higher balances, expect to pay 3% to 5% of the transfer balance.
Don’t be scared off by the balance transfer fee. It’s minor compared with the amount you’ll save in most cases. However, if you are transferring a large balance of several thousand dollars, don’t be alarmed by how high the fee can climb. For example, a 10% balance transfer fee on a $5,000 balance adds $500.
Though hard-to-find, some credit card issuers offer a 0% balance transfer fee card.
When looking for balance transfers, an introductory 0% APR is the best deal — and the only one you can consider. You can get this by opening a new account or through an offer on an existing account.
Make sure the 0% intro APR you see advertised isn’t just for new charges; the promotion should apply to purchases and balance transfers. Scour the fine print to make sure your situation is covered.
If you transfer a balance to an existing account, make sure it has a better interest rate than the card you’re transferring from. Promotional periods do expire, and you’ll be forced to pay the remaining balance at the full interest rate when they do. Know what these interest rates will be ahead of time, in case you’re unable to pay off the whole balance during the promotional period.
Standard interest rates range from 14% to 26%. If the standard rate is higher on the card for the balance transfer than your current rates for your credit cards, only move forward if you are 100% sure you can pay off all the debt during the promotional period.
Promotional periods typically range from 12 to 18 months (and up to 21 months if you’re lucky). You may only need 12 months to pay off small balances at a lower interest rate, while higher balances might take more time to pay off. Balance transfers with a longer introductory duration give you the best chance of paying off your total balance.
Keep in mind that failing to make at least the minimum payment voids most promotional offers, and you will be forced to pay the remaining balance at full interest.
If you have good or excellent credit, you have the best chance at scoring a 0% intro APR for cards offering balance transfers. Generally, FICO credit scores of 690 or better are required for the 0% interest rate.
While it’s harder to get a credit card for balance transfers with bad credit, it’s not impossible. In that case, they generally have higher interest rates with shorter promotional periods, which might still be a better option than your current situation.
Check if you’re pre-qualified for the balance transfer offer prior to applying for a credit card to avoid the hit on your credit.
You can’t transfer $3,000 onto a card with a $2,000 limit. Verify the card you’re considering has a credit limit that supports your transfer balance.
Why Balance Transfer Cards Make Sense
Consolidating your credit card balances from multiple cards onto one can be attractive for a few reasons.
They Can Save You Money
The 0% introductory APR on a balance transfer gives you an opportunity to pay off your outstanding debt without earning any more interest.Let’s look at a real-world example: Imagine you have a $1,500 credit card balance with a 15.99% APR. That means you’re being charged 15.99% interest on your average daily balance every year — and that’s on top of the minimum payment.
If you transferred that $1,500 balance to a card offering 0% APR for 12 months, then you avoid paying any interest on your balance for 12 months. That means if you make a $125 payment every month for 12 months, you can pay off the entire balance before the promotional period ends — and save hundreds of dollars in finance charges you’d otherwise pay on your high-interest debt.
They Can Help You Get Organized
Juggling multiple credit cards with different minimum payments and due dates can be exhausting — and puts you at risk of missing payments, which hurts your credit score and results in late fees.
Debt consolidation onto a single transfer card allows you to focus on a single payment each month, which greatly reduces your chances of missing it and incurring fees. Just be sure to always pay this one by the due date. As soon as you miss one payment, that 0% APR could go away — and that was the whole reason for incurring the fee to transfer the balance to a single card.
They Can Improve Your Credit Score
If done successfully (i.e., if you transfer the balance and pay it off before interest begins to collect), balance transfers can improve your score.
Negative Effects to Your Score
While you’ll have to deal with a hard credit inquiry when opening a new account, this won’t take long to fall off. You’ll also be adversely affecting the age of credit by adding a brand-new account and potentially closing old accounts.
Positive Effects to Your Score
But that’s all OK. Credit utilization makes up a whopping 30% of your score — more than credit inquiries and age of credit. Credit utilization is how much credit you are using versus the total credit available on all of your accounts combined.
Opening a new account and transferring a balance can increase your available credit (especially if you keep the old line of credit open) and positively affect your FICO score. And when you are more easily able to pay down that debt, you’ll see major improvements to your score.
How Balance Transfers Work
Does a credit card balance transfer sound like the solution for your debt situation? Here’s what you need to do:
1. Find the Best Credit Card for Your Situation
Using the tools provided above, assess cards on the market. Determine if you are pre-qualified to avoid taking a hit to your FICO score, then apply for the best card — one that offers a 0% APR introductory rate, ideally for 18 months, and that has a limit higher than the total of all the balances you’re looking to transfer. Bonus points if the interest rate post-promotion is lower than your current interest rate and the card offers some sort of rewards program.
2. Set Up the Transfer
You’ll need to be proactive about this. Many credit cards have a short period from account opening in which you are able to conduct your credit card balance transfer. It’s safest to do this within the first week of account opening, but the timeline can vary by card. You’ll either need to do this online or over the phone.
Have all the information you’ll need at your fingertips. The new card issuer will need to know more about the outstanding debt you’re moving over, including the account information, the debt amount and the credit card issuer name. Watch your account statement over the coming days to ensure it has transferred; confirm this not only in your new credit card account but on the old cards as well.
3. Create your Game Plan
Determine how much you need to pay toward the balance on your new card each month in order to pay it off by the end of the introductory period. Pause unnecessary payments on other accounts. For example, if you’re paying extra on the principal of your mortgage or contributing extra money from your paycheck to a 401(k), consider pausing those otherwise financially sound strategies to instead reroute extra funds toward paying down your debt.
You should also have a plan for your existing credit cards. Now that their balance is $0, your credit utilization will have soared. However, the credit card companies may close your accounts due to lack of activity. Close any of those old cards that charge an annual fee. For the others without an annual fee, set reminders to buy something cheap (e.g., a pack of gum) frequently enough that the cards stay active. Just remember to pay off those purchases immediately so you don’t fall back into debt on those cards.
Timothy Moore covers banking and investing for The Penny Hoarder from his home base in Cincinnati. He has worked in editing and graphic design for a marketing agency, a global research firm and a major print publication. He covers a variety of other topics, including insurance, taxes, retirement and budgeting and has worked in the field since 2012. Reporting from former Penny Hoarder staff writer Stephanie Bolling is included in this report.