How Balance Transfers Work

Introduction

Credit card balance transfers are often touted as a low- or no-interest way to quickly pay down high-interest credit card debt. But the act of transferring a balance has nothing to do with the interest rate on either card — it’s just the benchmark people use to decide if it makes sense to pull the trigger.

So if you have a good balance transfer offer, and you have a plan for paying off the transferred balance, this credit card debt-consolidation method may be a good option for you. But it’s not a cure-all for wiping out credit card debt, and you should know the parameters before making a decision.

What Is a Balance Transfer?

A balance transfer occurs when you move the balance owing (or part of it) from one credit card to another. Essentially what’s happening is you’re using one credit card to pay down another.

Ideally, you’re moving the balance from a higher-interest credit card to a lower-interest credit card in order to save money on interest. Some credit card companies will even offer a 0% annual percentage rate (APR) incentive to transfer your outstanding credit card balance to their card. You’ll often see these 0% APR balance transfer opportunities either as introductory welcome offers on a new card, or as special promotional offers for existing cardmembers.

However, you can usually transfer a balance from one card with one issuer to another card with another issuer anytime you like. A simple way to do this is by using a balance transfer check issued by one bank to pay your credit card bill with another bank. It processes just like a regular check, but instead of the funds coming from your checking account, they come from the other card — which now has that balance.

If you don’t have a balance transfer check handy, or you’d rather not deal with paperwork, you can also check your online account for balance transfer offers from the receiving card issuer, or call them and ask if you can do a balance transfer over the phone. Either way, you’ll need to provide the other credit card’s account number, the issuer name, and the amount of debt that you want to transfer from the original card.

Benefits of a Balance Transfer

Strategically taking advantage of a balance transfer has some potential benefits for your financial life.

• Combining multiple balances onto a single credit card can help simplify your finances so you’re only making one payment per month instead of several. If your debt doesn’t all fit on the one card, you can at least reduce the payments on your highest-interest card.
• Getting a low- or no-interest promotional rate on balance transfers is the equivalent of a low-interest loan, which typically lasts for 12 to 24 months before reverting to the normal APR. If you can pay off the entire transferred balance within the promotional period, you might save hundreds (or even thousands) of dollars in interest charges.
• Opening a new credit card with an introductory balance transfer offer means you’ll have more available credit, and your credit utilization ratio may decrease — which can contribute toward increasing your credit score. Your credit utilization ratio is a major factor for credit score calculation, and a lower ratio usually means a higher score.

Drawbacks of a Balance Transfer

Like everything in life, balance transfers come with pros and cons.

• Transferring balances between two cards from the same bank is usually not allowed, even if one has a 0% introductory balance transfer offer. So you’d need to use a card from a different issuer, which might require applying for a new card with a new bank — and the resulting hard inquiry could lower your credit score slightly.
• Finding a 0% APR offer on balance transfers can be challenging, especially if you don’t have good to excellent credit. You can usually transfer a balance whenever you like as long as you have room on the receiving card, but transferring from a card with a 29% APR to one with a 27% APR might not provide the savings you’re looking for.
• Paying down debt interest-free sounds good, but balance transfer promotional rates are usually for a limited time. If you don’t pay the full balance before the promotional period ends, the remaining amount will accrue interest at the regular APR, and missing one payment could mean forfeiting the lower rate altogether.
• Paying a balance transfer fee is usually required on top of whatever the promotional interest rate is. Balance transfer fees are typically around 3% to 5% of the amount you transfer, and get added to the new balance — which means the receiving card needs enough available credit for both the debt you’re transferring and any associated fees.
• Using your balance transfer card to make purchases or get cash advances may reduce your ability to pay off the transferred balance before the promotional period ends. The Credit CARD Act of 2009 requires credit card issuers to apply payments above the minimum amount due to the balance with the highest interest rate, which likely won’t be your balance transfer rate.
• Increasing debt by overspending is a potential pitfall if you’re looking at the balance transfer as free money and using up your other available credit on top of it. This will likely also increase your credit utilization ratio.
• Understanding your card’s grace period, and knowing that you’re giving it up by carrying a balance (even with a promotional APR) is an important piece of the puzzle that many people don’t consider. Paying off your full balance during your grace period could let you avoid any interest charges at all, which makes the APR — and the balance transfer — irrelevant.

FAQs

Here are some frequently asked questions about credit card balance transfers.

Does a balance transfer hurt your credit score?

A balance transfer could impact your credit score in a few ways, depending on how it’s executed. First, if you’re applying for a new card, the resulting hard inquiry can lower your credit score by a few points. Secondly, the card receiving the balance transfer will likely end up with a very high credit utilization ratio, which could lower your score even if your aggregate ratio across all cards goes down. And finally, the new card can decrease the average age of your accounts. However, the ability to pay down debt at a lower rate can lower your utilization ratio and increase your score in the long run.

How long does a balance transfer take to process?

Balance transfers can take anywhere from a few days to a few weeks to process. Transferring a balance to a new card often takes longer than transferring a balance between two existing accounts. If you already had both cards, the transfer should take about the same amount of time as posting a payment.

What happens if I don’t pay off the balance transfer before the promotional period ends?

If you have a promotional interest rate and don’t pay off the balance before the promotional period ends, you’ll start accruing interest on your unpaid balance at the standard APR. Some deferred interest offers will even backdate your interest charges to the beginning of the transfer period, so if you have $1,000 of your transfer left at the end of a six-month promo period, the interest on that $1,000 may be calculated over the entire six months.

Can I transfer balances between two cards from the same bank?

No, most banks will not let you transfer your balance from one of their cards to another of their own cards. Balance transfers typically need to be done between credit cards from different issuers.

Is there a limit to how much I can transfer?

Yes. Several factors will determine how much you can transfer. First of all, the card you’re transferring the balance to will have a credit limit, and you can’t transfer more than that amount. And if the card already has a balance, you need enough available credit to accommodate the transfer as well as any associated balance transfer fees. Beyond that, each credit card and each issuer may have its own rules and restrictions around balance transfer amounts.

Bottom Line

A balance transfer can be a good way to reduce high-interest credit card debt — if you can get an attractive APR on a card with a high enough credit limit, then pay off your transferred balance by the time the promotional period expires, and don’t continue to rack up more debt in the meantime.

But it’s important to read the fine print before you sign up for a balance transfer. That way you can make sure you understand the terms and are fully prepared for any additional fees or conditions required to make the transfer happen.