Credit cards can be great for building credit history or for earning rewards for things you purchase anyway. Still, they can get expensive as your balance carries over month over month. Carrying any balance month-over-month on a credit card with an interest rate results in accruing monthly interest, especially if the balance and the annual percentage rate (APR) are high. Moving balances to a different credit card to reduce interest can give you sizeable savings on interest payments. This is one of the most common reasons to pursue a credit card balance transfer.
In this blog, we’ll cover the fees involved, the cards to look for, and when to use balance transfers to save on credit card interest.
What is a balance transfer?
A balance transfer moves an outstanding debt from one credit card to another, the latter of which is usually a new card. The transfer doesn’t reduce the amount owed. Instead, it can shift outstanding credit card debt to a lower APR card. Card issuer often offer a particularly low APR for an initial promotional period—commonly 12-18 months—to help attract balance transfers.
When used strategically, balance transfers help borrowers reduce their credit card interest charges. This can lead to lower monthly payments and less total interest paid.
The amount of interest saved through a balance transfer can be significant. It’s still important to take time and understand the offer so you can ensure the benefits outweigh the costs of performing the transfer.
What is a balance transfer credit card?
There’s nothing special about the term “balance transfer credit card.” Nearly any credit card can be used for balance transfers if its APR is low enough to make a transfer worthwhile. There are some restrictions and you’ll want to check with the lender to see if you card qualifies. For example, lenders typically make these offers to bring in new card holders and may not allow current card holders to take advantage of a balance transfer offer. Many cards are promoted explicitly as a balance transfer card; however, they are based on attractive offers (often temporary) such as low APR, $0 balance transfer fees, the chance to earn rewards on a transferred balance, and more.
With any promotional offer, it’s essential to verify how long the offer lasts and what the standard terms will be if you don’t pay off the balance in full before the promotion ends.
What is a balance transfer fee?
Many credit cards have a balance transfer fee that’s 3-5% of the transferred amount (with a minimum for small transfers). The fee is typically added to the amount transferred to the new card. It doesn’t have to be paid at the time of the transfer but is added to the outstanding balance. When considering a balance transfer, first on interest to see if it will outweigh the cost of any fee. The best balance transfer cards have no fees associated with transferring balances.
Example of a balance transfer.
To see how the interest rate and balance transfer fee offers compare, consider an example couple: Jeremy and Alexis. The couple has an outstanding credit card balance of $3,000 and are charged 20% interest.
Here are three simplified scenarios for paying off their credit card in 18 months:
Keep current card.
Balance Transfer fee: $0
Interest: 20% APR
Monthly payment: $200
Total payoff amount: $3,497
0% Interest Balance Transfer with 5% Balance Transfer Fee.
5% Balance Transfer fee: $150
Interest: 0% APR
Monthly payment: $175
Total payoff amount: $3150
1.99% Interest Balance Transfer with No Balance Transfer Fee.
Balance transfer fee: $0
Interest: 1.99% APR
Monthly payment: $170
Total payoff amount: $3,047
In both scenarios, taking a balance transfer is a better overall option than focusing on paying down their current card. However, in this instance, it’s a more significant cost savings for the couple to pay some interest with no fee than taking a 0% interest card with a balance transfer fee. Additionally, Jeremy and Alexis can save even more and pay down their balance sooner if they decide to keep their monthly payment at $200, regardless of their balance transfer option.
It’s also important to note that all three of these scenarios assume that there is no additional spending on the credit cards, and the examples are simplified and rounded to the nearest dollars. Lastly, in both balance transfer examples, the final payment would be less than the target monthly payment in the first 17 months.
How does a balance transfer work?
Balance transfers are routine transactions that many people complete every day. Credit card providers make it easy to complete a balance transfer, regardless of what cards you’re transferring from and to.
To complete a balance transfer, follow these steps.
Find a new credit card offer that works for you.
Research a balance transfer card to which you want to move your outstanding credit card debt (see Types of Credit Cards below). Be sure to confirm the credit limit, balance transfer fee, interest rate, any introductory period, and perks (if applicable) of your new credit card. Use our calculator to make evaluating your options simple.
Determine your amount to transfer.
Before starting the request, determine how much you want to transfer. For most people, this is the lesser of the outstanding balance and the new card’s limit.
Open your new card.
Apply for a new credit card. This can range from an immediate approval or could take a few days to process in some cases. Timing can be due to your unique credit evaluation or be related to how a financial institution processes their requests and makes a card offer.
Initiate the balance transfer.
Most credit card companies allow you to initiate the balance transfer online, by phone, or by convenience check. Using a convenience check may incur additional fees with your current credit card. You’ll need the current card’s issuer, the account number (credit card number), and the amount you’re transferring.
Confirm the transfer is made.
You should receive a notification when the transfer is complete, but watch your account balances in case you don’t receive a notification. Transfers can take a few days—and occasionally a few weeks—if you use a convenience check and the issuers are slow to process.
It’s important to understand that in most cases, the balance will be added to your new credit card immediately, even before it is paid off for the other card. To be safe, ensure you continue making on-time payments to your existing card.
Pay down the balance.
Ideally, you should use balance transfers as a tool for paying off the balance, reducing debt, or gaining new perks. To pay off debt, make a payoff plan, and mark any important dates (i.e., the end of an introductory period) on your calendar.
While balance transfers are usually done between credit cards, you might alternatively use this process to transfer a personal loan or other debt. Review the terms and conditions of the card offer you’re considering to ensure that it will work for the kind of debt you have.
Pros and cons of balance transfers.
Balance transfers have advantages, and you can use them strategically if you understand their pros and cons.
Pros of balance transfers.
A successful balance transfer can benefit you in many ways:
- Save hundreds or thousands in interest payments
- Obtain a reduced interest rate that’s low or 0% APR
- It may help lower your monthly payment and/or pay off your balance faster
- No fees must be paid at the time the transfer is completed
- It might improve credit score in the long term
- Transaction is usually easy to complete
Your potential savings can be substantial in terms of lower monthly payments and long-term savings on interest.
Cons of balance transfers.
Before transferring a balance, it’s important to understand the risks.
- Balance transfer fee increases your outstanding balance
- Only borrowers with good-excellent credit may qualify for the best cards
- You may lose an introductory offer if you miss a monthly payment
- Rates may increase substantially after the promotional period
If you don’t have a solid budget and a plan for paying down the balance transfer, or if you plan to keep spending against the card, it might not make sense in the long run.
What types of credit cards are ideal for balance transfers?
Any credit card that has an opportunity to reduce the total cost of your debt is a potential balance transfer card for you. The best balance transfer credit cards have:
- Low introductory APR (e.g., for 6, 12, or 18 months)
- $0 annual fee (or an annual fee with excellent perks)
- $0 balance transfer fee (or a way to avoid the fee)
Only well-qualified borrowers will easily qualify for cards with all these features. In general, look for the lowest introductory interest rate you can get without any annual or balance transfer fees.
Balance transfers can affect your credit score.
Any meaningful change in your debt will impact your credit score. A balance transfer can affect your credit score in both the short-term and long-term.
Short-term impact on credit score.
Expect your credit score to drop slightly immediately after you complete a balance transfer. This is because you’re taking out a new line of credit. New credit accounts for 10% of your FICO credit score. This will only be a temporary impact and is a minor one.
Long-term impact on credit score.
You’ll have the opportunity to improve your credit score in the months after completing a balance transfer. So long as you make the minimum payments on time and monitor your utilization rate, you should see steady improvement over time. The improvement stems from a combination of factors, including:
- You’re paying down your debt faster
- Your debt-to-available-credit ratio is improving, especially if you keep the old card open but unused
- With a lower interest rate, you can keep your payment history in good standing
Consider a balance transfer.
Balance transfers have a prominent place within credit card payoff strategies. While they’re not right for everyone or every situation, they certainly can help. Transferring a balance to a new card with a lower APR can certainly provide great savings on interest, as long as you’re disciplined enough not to use the freshly paid-off credit available with your old card.
If you want to explore what balance transfer options are available to you, begin assessing how much you’d transfer. You might also spend time researching other strategies for paying off debt or learning how to navigate credit reports and understand credit scores. Finally, you might consider whether it’s a good time to request an increase to your credit limit to facilitate a larger balance transfer.