What is a balance transfer and how does it work?

If you’re dealing with pricey credit card debt, a balance transfer could be a useful tool in your debt reduction strategy. A balance transfer is simply the process of moving high-interest debt from one or more credit cards to a credit card with a lower interest rate.

A good balance transfer credit card can help you pay off debt faster since more of your payments go toward the card’s principal balance each month instead of toward interest charges. It can also save you hundreds, if not thousands, of dollars in interest because the transferred balance will have a low or 0% APR for a limited time, usually six to 21 months.

Balance transfers, however, aren’t free. Most issuers charge a balance transfer fee, and there are other factors to consider before applying for a low or 0 percent interest credit card.

Here, we break down how balance transfers work and provide some tips on how to determine if this debt repayment strategy is right for you.

How balance transfers work

When applying for a balance transfer with most major issuers, you generally have to take the following steps:

1. Apply for a card. You can apply for a balance transfer card online in a matter of minutes. You should look for a card with an introductory 0 percent APR offer on balance transfers, but you will need to have good or excellent credit to qualify.
2. Initiate the balance transfer. You’ll need to know the account number for your existing balance and how much you want to transfer. Your new issuer may approve the full amount or only part of your balance transfer, depending on your credit limit and the issuer’s transfer limits. After the transfer is approved, issuers facilitate a payoff of the existing balance. Some issuers send payment to the original creditor, while others require you to pay using a furnished balance transfer check. Once the transfer goes through, you’ll make payments to your new creditor.
3. Wait for the transfer to go through. Balance transfers are not instantaneous. Depending on the issuer and a number of other factors, your balance transfer could take three days to six weeks to complete. And while your credit card issuer should be able to give you a sense of how long it will take, there’s no way to know in advance exactly how long you’ll have to wait for the transfer. In the meantime, be sure to pay at least the minimum due to your existing creditors. Failing to do so could lead to late fees and damaged credit and could even disrupt the balance transfer in progress.
4. Pay down the balance. You can start paying the balance on your new card once the transfer is completed. If you are able to pay off your balance during the introductory 0 percent APR period, every penny will go towards the balance you owe considering there is no interest.

Which types of debt can be transferred?

Most people consider balance transfer cards when they are trying to pay down high-interest credit card debt. However, that isn’t the only type of debt you can transfer to a balance transfer card. Depending on the issuer, you may be able to transfer the following debts:

• Credit card debt
• Auto loans
• Personal loans
• Student loans
• Home equity loans

How much debt can you transfer?

The amount of debt you can transfer from one account to another will vary by issuer. Typically, your credit card issuer is going to consider your credit history and income, among other factors.

There’s no way to know for certain how much you’ll be approved for in advance. But it’s important to note you’ll have to pay a balance transfer fee — usually 3 percent to 5 percent of the total amount transferred. If your approved credit limit is low, you might not be able to transfer your full balance.

How much money can you save with a balance transfer?

Balance transfers can help you save money when you transfer high-interest balances to a new card with a lower interest rate, but how much money you can save depends on several factors:

• The interest rate you’re currently paying on your balance
• The amount you pay each month toward that balance
• The amount you plan to pay each month toward the balance after the transfer
• The ongoing interest rate you’ll pay after the promotional period expires (if you don’t pay off the transferred balance)
• Any annual fee associated with owning the new card
• The balance transfer fee, if applicable

How much could you save with a balance transfer? Let’s look at an example where you currently owe $3,000 on a card that has a 20 percent APR, you are currently paying $200 per month and you don’t anticipate any increases to the APR or monthly payment.

If you were to transfer that debt to a card with an introductory offer of 0 percent APR for 15 months, no annual fee and a 3 percent balance transfer fee (which equals $90), you would save roughly $392 during the introductory period.

Benefits and drawbacks of a balance transfer

Benefits

Though the specific terms will vary by credit card or issuer, there are two major balance transfer benefits:

• You can escape high interest charges. Credit card APRs are at an all-time high in the wake of the Federal Reserve’s efforts to curb inflation in 2022. If you’re carrying a balance on a credit card with an APR of 19 percent (the current national average) or higher, the interest charges will pile up and your debt may soon feel insurmountable.
• You can consolidate your debts. Transferring balances to a single low-interest credit card can not only save you money and help you pay off debt, it can also simplify your financial life. If you’re carrying high balances on multiple high-interest credit cards and have a hard time keeping payment due dates and minimum payments straight, you may end up accruing late fees. In that case, putting all your credit card debts on one card can be a good move, since you’ll have just one card to keep track of and one payment to make each month.

Drawbacks

As previously stated, balance transfers aren’t free. There are important terms and conditions to familiarize yourself with before applying for one. Some balance transfer drawbacks to be aware of include:

• Fees are almost inevitable. Balance transfers can be a great way to save on interest and focus on paying down debt, but they come with a cost. You’ll almost always be charged a balance transfer fee, which is a percentage of the total amount you’re transferring. According to CreditCards.com research, the most common balance transfer fee is 3 percent, but some cards charge 5 percent. For example, if your issuer charges a balance transfer fee of 3 percent and you transfer a $10,000 debt from another card, $300 will be immediately added to your transferred balance, bringing the total amount you owe to $10,300. There are a few credit cards with no balance transfer fee, but the tradeoff is usually a shorter 0 percent introductory APR period.
• Promotional balance transfer APRs and transfer rates expire. A balance transfer card may woo you with its super-low or 0 percent introductory APR offer, but don’t be fooled. That “teaser rate” doesn’t last forever. After a set period — often six months to a year, occasionally more — the interest rate will increase to its regular rate, which could be even higher than the one you were trying to escape. You also don’t want to waste time getting the balance transfer process started. Some cards offer a lower balance transfer fee if you transfer the balance within a set period. If you aren’t proactive, you could end up seeing your balance transfer fee increase, which could cost you hundreds.
• Multiple balance transfers can impact your credit score. You may think applying for a new balance transfer card when your teaser rate expires is the perfect solution to avoid paying interest on your credit card debt. While you can do that, know that multiple card applications can damage your overall credit score. When you continue to open new low-interest accounts but maintain high debt levels, lenders may see you as a risk, which will make it hard for you to borrow money for big-ticket items such as a home or car, or even qualify for that second or third balance transfer card deal.

Should you do a balance transfer?

A balance transfer can be a solid debt-repayment strategy, allowing you to save on interest and chip away at your balance over time. But it’s not the best option for everyone. To ensure a balance transfer is right for you, consider the following:

• How much do you need to transfer? As previously mentioned, even if you’re approved for a balance transfer card, the credit limit you are offered may not cover the full balance you want to transfer. If your balance is too big to transfer all at once, you’ll have to decide if it’s best to transfer a portion, apply for multiple cards or work with your existing creditors to get a lower interest rate.
• Do you have a repayment plan? It’s critical that you go into your balance transfer with a plan for how you’re going to pay off your debt and make the most of a card’s 0 percent introductory APR period or low ongoing APR. Otherwise, you may just find yourself back where you started. Additionally, if you don’t make timely payments, you could lose your 0 percent APR and may even trigger a penalty APR.
• What got you into debt? You may be motivated to pay off your debt, but if you haven’t addressed what caused you to get into debt in the first place, you might use your new card to create an even bigger balance. What’s worse, you could end up stuck with a high interest rate on your new card once the promotional period ends.
• Good credit is required to qualify. To take advantage of the best balance transfer offers, you’ll need good to excellent credit. Instead of trying to do a balance transfer with bad credit, consider a debt consolidation loan or focus on paying down your balances as much as possible before you apply to rebuild your credit score and get better terms.

Balance transfer tips

If you’re looking to consolidate your debts, you may as well save money while doing it. It’s important to choose the right card that will help minimize your costs. However, here are a few other things to consider when completing a balance transfer:

• Is there a 0 percent APR offer? If you can move your debt over to a credit card with a 0 percent introductory APR offer, you will be paying your debt off interest-free. Keep in mind that the larger your debt, the longer you will want the intro offer to last.
• Is there a balance transfer fee? Your balance transfer card is most likely going to come with a fee. And if your approved credit limit on your new balance transfer card is low, you may not be able to transfer your full balance.
• Are there rewards? You aren’t going to earn rewards on your balance transfer, but some rewards cards come with balance transfer intro offers. The important thing to remember here is that once you pay off the debt you transferred to a credit card with a strong rewards program, you will continue to see benefits in your everyday expenses.

Bottom line

A balance transfer credit card can be a useful tool to pay off debt faster without incurring interest. But there are several things you need to consider to make a balance transfer work for you, including transfer fees and your financial habits.

Prepare a repayment plan before starting a balance transfer to ensure that you will pay off the balance before the introductory APR period ends. Also, avoid adding to your credit card debt. Otherwise, the benefits of a balance transfer may be null.