A balance transfer simply moves a balance from one lender to another. With this in mind, some credit card issuers offer cards that are designed to make balance transfers onto the card easy. These cards are often called balance transfer cards. They may offer promotional periods, during which you can move balances onto the card without paying a fee or with a reduced fee and with low or even no interest on the balance that you transferred.
A balance transfer card can be a useful debt management tool. If you pay off the balance you transferred before the promotional period expires, you can save money on interest costs. If you aren’t careful, though, you could end up with even more credit card debt. Understanding how balance transfers work can help you assure that your balance transfer will work for you.
How a Balance Transfer Works
Each issuer has its own terms for balance transfers, but most have some features in common:
- You can transfer different types of debt onto a balance transfer card. Almost all issuers will accept balance transfers from other credit cards. Many will also accept transfers of installment loan balances.
- Most issuers will only accept balance transfers from the cards of other issuers. From your issuer’s perspective, the point of a balance transfer is to move a potentially profitable debt from another company’s account onto theirs. They don’t want you shifting balances from one of their cards to another.
- Many credit cards will allow you to transfer a balance onto the card at any time. There is often a fee for this service. The fee is often a percentage of the balance you transfer. Be sure to consider the fee when you’re deciding whether a balance transfer is worthwhile.
- When you transfer a balance, the issuer of your balance transfer card pays off the account with the issuer of the original card. That issuer cannot stop the transfer, because all they see is a completed payment. The balance then appears on the statement of your new card. The balance transfer process may take 5 to 7 days to complete.
Once the balance transfer is complete your statement on your old card should show no balance and the balance should appear in full on your new card.
Most card users prefer to transfer balances onto a new card acquired specifically to receive incoming balance transfers. These cards often offer low-fee or no-fee balance transfers and low or even zero interest rates during a promotional period.
What Should I Look for in a Balance Transfer Card?
There are hundreds of balance transfer cards on the market, many with varying terms and requirements. Selecting the right card is a critical part of using a balance transfer card effectively.
Here are some things you should do when shopping for a balance transfer card:
- Check the card’s issuer. The issuer of a credit card is different from the credit card network. MasterCard and Visa are networks, for example. On the other hand, the card issuer is usually a bank or other financial institution. Some networks, like Discover and American Express, are also issuers. Your balance transfer card needs to be from a different issuer than the cards with the balances you intend to transfer.
- Be sure you’re eligible. Most balance transfer cards with desirable terms require good or excellent credit.
- Check the interest rate promotion. Many balance transfer cards offer a low interest or even zero-interest promotional rate for transfers made within a set period after you get the card. Make sure you clearly understand the terms and limitations of the promotion. Know when it expires and how long you have to transfer balances after you get the card. Be aware of any conditions that could cancel the promo and return you to the regular rate. Some cards may cancel the promotion if you make a late payment.
- Check for balance transfer fees. Many cards have fees for balance transfers. The fee may be a percentage of the balance that you transfer. Be sure to consider these fees when you decide whether a balance transfer card is worth the effort.
- Be aware that different balances may carry different interest rates. Even if the balances you transfer are covered by a promotional interest rate, you may still pay interest if you use your card for purchases or cash advances. These balances may carry higher interest rates than the advertised rate for balance transfers.
- Check the fees. Many cards have fees for balance transfers. The fee may be a percentage of the balance that you transfer. Be sure to consider these fees when you decide whether a balance transfer card is worth the effort. Many cards may impose a range of other fees, including annual fees, late payment penalties, and potentially others as well. Always be aware of these fees, what actions may trigger them, and their impact on the total cost of using a balance transfer card as a debt management tool.
- Check the rewards. Rewards are not the main point of a balance transfer card. Your priority will be the balance transfer terms and related costs. It’s still a good idea to be aware of any rewards the card offers and to look for cards that offer rewards that are compatible with your spending habits.
- Know your credit limit. Your credit limit will depend on your credit and financial information, but if you’re approved for a balance transfer card you should always check the credit limit. You don’t want to transfer balances that will exceed your limit, and even getting too close to your limit can affect your credit.
How to Use a Balance Transfer Card
The goal of using a balance transfer card is to pay off the transferred balance before the promotional period expires. If you succeed, you can use that interest-free period to use your entire payment to reduce your balance, rather than paying interest.
Here are some steps toward achieving that goal:
- Choose the balances you want to transfer. Prioritize your highest-interest balances. Many balance transfer cards will allow you to transfer installment loan balances, but In most cases, it’s not a good idea, as installment loan balances are usually lower than those of credit cards. The exception would be a small remaining balance on an installment loan but be sure you can pay it off before the promotional period expires!
- Remember your credit limit and keep your transfers below it.
- Develop a plan for paying off your balances within the promotional period. Don’t transfer more than you can pay. Be sure your plan is realistic.
- Be sure you make at least the minimum payment on your old card until the entire balance is transferred and has appeared on the balance of your new card. A missed payment can hurt your credit.
- Avoid new spending on both your old cards and your new card while you are paying off that transferred balance.
- Keep your old card open. It will increase the average age of your credit accounts and decrease your total credit utilization. That can help your credit. If you’re tempted to spend on it, lock it up or cut it up, but don’t close it.
- Remember that late or missed payments may cancel your balance transfer promo. Miss a payment and you could be right back to paying the regular interest rate. That could be an expensive oversight!
If you pay that balance off before the promo period expires, congratulations! You’ve made a significant reduction in your debt and dramatically reduced your interest payments.
What Could Go Wrong?
In a best-case scenario, a balance transfer card can help you cut interest payments and reduce debt. That’s not always what happens. These are some of the hazards of using a balance transfer card as a debt management tool.
- You might miss a payment on the old card because you thought the balance transfer was complete before it actually was.
- You might keep spending on your old credit card, piling up a new high-interest balance.
- You might not be able to stick to your payment plan. You could end up making only minimum payments until the promo period runs out and you’re back to paying high interest.
- You might transfer an installment loan balance, thinking you can pay it off at zero interest, then fail to pay it off and end up paying more interest than you were before.
Making even one of these mistakes could negate the advantages of your balance transfer card. Making all of them could leave you buried under a growing mountain of high-interest debt.
How Will a Balance Transfer Affect My Credit?
A balance transfer does not appear on your credit report and has no direct impact on your credit. Changes in your accounts could indirectly affect your credit in several ways.
- New Credit. Applying for a balance transfer card will register a hard inquiry on your report and any new account will reduce the average age of your accounts. That could have an impact on your credit.
- Credit Utilization. Scoring models consider both total utilization and utilization on your individual accounts. Keeping your old accounts open will control total utilization but transferring significant balance onto your new card could give you one account with a high utilization ratio.
- Overspending. If you don’t maintain discipline you could end up adding new charges and failing to pay off the old ones. This could have a long-term impact on your credit.
If you are sure that you can pay off the transferred balances during the promo period, don’t let the possibility of a short-term drop in your credit deter you. Removing that balance will help you in the long run.
When is a Balance Transfer Card a Good Move?
A balance transfer can be a useful debt management tool, but it isn’t the right tool for every person and every situation. Here are some signs that it might be the right tool for you.
- You have good to excellent credit and qualify for a balance transfer card that suits your needs.
- You have high-interest balances that you want to pay off quickly.
- You’ve gotten a raise, or a better job and you want to devote that new income to debt reduction.
- You’re sure you have the means and the will to pay off the balance that you transferred within your card’s promotional period.
If you aren’t sure you can pay the balance off or you’re worried about your ability to control your spending, a balance transfer might not be the right tool for you.
A balance transfer can be an effective way to pay off high-interest balances quickly without diverting much of your payment to interest costs.
Balance transfers aren’t available to everyone: you’ll need good to excellent credit to qualify. You’ll also have to be sure that you can pay off the balances you transfer before the promotional period on your card expires.
Using balance transfers effectively requires attention to the details of the terms, a realistic plan, and the will to implement that plan. If you have all those things, a balance transfer card can be an effective way to pay off your credit card balances without interest.