What Is a Balance Transfer and How Does It Work?

Are you drowning in interest rate charges with your credit card? Sometimes it can feel impossible to pay off your entire balance all at once. However, a balance transfer credit card can resolve that issue. Balance transfers have become increasingly popular with volume up 38% between 2015 and 2018, according to research by the Consumer Financial Protection Bureau.

Many major credit card issuers offer cards that tout balance transfer as the main feature or as a secondary incentive to miles, cashback or points. With interest rates reaching the high 20% range in some instances, transferring a balance and spreading payments out over several months can be a promising solution to paying down credit card debt.

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    What is a balance transfer?

    A balance transfer is a pretty simple concept to grasp. You could compare it to a mortgage or auto loan refinance in that your main objective is to seek a lower interest rate and cut down on the total cost of the purchase over time. There’s a key difference, however. A credit card involves a revolving line, which means unlike a car loan or home purchase, you can continue to buy goods and services up to your maximum credit limit. Therefore, calculating your interest costs will be more difficult if you transfer a balance between credit cards and continue to make purchases beyond the promotional period.

    Let’s keep it simple and illustrate how a basic balance transfer can help you shed interest charges and pay down debt quickly.

    If you own Card A and have accumulated a balance of $20,000 with a 24.99% APR, and your goal is to pay that debt off in 12 months — that would cost you $1900.79 per month. Card B is offering you a 0% balance transfer option for a 12-month period. If you move your balance from Card A to Card B, your new payment for the next year would be $1,666.66 per month, and you’d avoid paying $2,809.44 in interest fees. With some card issuers, you could find terms that extend beyond 12 months at 0% interest.

    How to do a balance transfer

    Once you decide to pursue a balance transfer, you’ll want to shop for the best option available. This may boil down to the number of months you can leverage and the perks you can pick up along the way. Sometimes cards that offer terms longer than 12 months with no interest might not offer rewards, so always assess the value of perks and features versus the ability to stretch out payments over a longer period.

    After you’ve made your choice and earned approval for the new card, it’s time to initiate the transfer. Contacting the new issuer by phone or over the internet is the easiest way to move your balance from an existing card to the new one. You’ll need to have your current account number, and the transaction will be underway once you’ve provided all the required information. Depending on the issuer, the transfer could take up to a few weeks to process. So, it’s important to continue to make payments on the older account until you have evidence that the transaction is completed.

    If your primary focus is to pay down that transferred balance, do your best to refrain from making any new purchases on either card. Make your payments on time to whittle that balance down to zero and avoid late fees. Establishing a discipline with your credit cards will help your cash flow and overall financial health in the long run.

    Choosing a balance transfer card

    As you’re performing research on a balance transfer card, you’ll want to find answers to the following questions:

    • Who is the issuer? In all likelihood, you won’t be able to transfer a balance between two cards from the same issuer.
    • Are there fees involved? Some issuers will waive balance transfer fees to incentivize potential customers and others could charge up to 5% per transfer.
    • What if I pay late? Not paying by the due date could throw your whole plan off the rails. A late or missed payment might convert your 0% interest rate to a regular purchase APR, which may be high.
    • What about rewards? Some cards may offer an extended time period at 0% interest and a low APR thereafter. However, these cards won’t usually offer attractive rewards on purchases. If you can strike a balance between an acceptable regular purchase rate and rewards for a card, that scenario might be a worthy compromise.
    • Will my credit be impacted? In applying for the new card, a hard hit on your credit profile could lower your score. However, a new credit line will improve your utilization ratio, which is the total amount of credit card debt you hold divided by your overall credit limit.

    If you’re intent on acquiring a balance transfer card, planning is central to paying down your debt. Make room in your budget for new interest-free monthly payments, and diminish your debt while the 0% interest plan is in full effect.

    The savings on interest charges can be massive, and you don’t want to end up with a similar problem down the road. That situation could easily occur if you make purchases with one or two cards that you can’t pay off immediately. With two credit lines, you could actually end up with a larger balance subject to a high APR, and that’s a circumstance you’ll want to avoid.

    Editorial Note: Compensation does not influence our recommendations. However, we may earn a commission on sales from the companies featured in this post. To view our disclosures, click here. Opinions expressed here are the author’s alone, and have not been reviewed, approved or otherwise endorsed by our advertisers. Reasonable efforts are made to present accurate info, however all information is presented without warranty. Consult our advertiser’s page for terms & conditions.

    Thom Tracy

    Contributing Writer

    Thom Tracy is a personal finance writer from Scranton, Pennsylvania with 28 years of experience in the insurance, employee benefits and financial services industries. His work has appeared in QuickBooks and Investopedia. In his spare time, Thom likes to cook, hike and discover new music.