The Basics of Credit Card Balance Transfers Explained

Transfers can be great or not so great—the devil is in the details

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Balance transfers can be a great way to pay off high-interest debt, especially if you qualify for a promotional interest rate. But make sure you understand how balance transfers work before you apply. There are usually fees and some common pitfalls as well as advantages.

Why Transfer a Credit Card Balance?

A credit card balance transfer allows you to move one card balance—or sometimes even the balance of a student or personal loan—to another credit card. You would enter the details of the balance you want to transfer, including the account number and transfer amount, when you apply.

One of the best reasons to transfer balances is to take advantage of a lower interest rate offered by another lender.

Different Card Options

Virtually all cards require that you pay a balance transfer fee, and most offer promotional periods, and these can be fairly similar. But you'll want to look beyond these factors.

Equally important are the interest rate you'll be charged when the promotional period ends, and other types of perks the lender might offer, such as rewards, cash back, no annual fees, and sign-up bonuses.

Ideally, the promotional period will be long enough for you to pay off your transferred balance before the regular interest rate kicks in. The longer, the better. Short of that, choosing the card with the lowest regular annual percentage rate (APR) can save you money in the long run.

How to Transfer a Card Balance

Your new credit card issuer will generally initiate the process of transferring the balance to your credit card if your application is approved. Your credit limit must be high enough to accommodate the balance you're transferring—otherwise, you might only be able to transfer a portion of that debt.

You might also be able to transfer a balance by phone or online after your credit card account has already been established.

Important Features

Make sure the card you've chosen allows balance transfers. Read through the terms and conditions for the credit card. You can almost certainly use it to transfer a balance if it lists an APR and fee for balance transfers—always assuming you qualify and are approved for the new card.

Likewise, it's safe to assume you can't transfer balances to that credit card if these costs aren't listed, but you can always call the card's customer service to confirm.

You'll Have 2 Separate APRs

You'll have two APRs to consider with a balance transfer credit card: the promotional introductory rate and the regular rate that will apply after the introductory period has ended. Compare the post-promotional interest rate to the interest rate on your current credit card to see if you're really getting a good deal.

That lower introductory rate won't last forever, but you can maximize your balance transfer savings by paying off the entire transfer during the promotional period.

Balance Transfer Fees

Be sure you know the balance transfer fee you'll be charged as well. This fee is usually added to your balance automatically when you transfer it, so the lower, the better.

Some lenders won't charge the fee until after 60 days or so, but it often kicks in immediately and is added to your owed balance. You can expect to pay anywhere from 3% to 5% of the amount you've transferred.

Restrictions Can Apply

Lenders exert some control over transfers by setting certain limitations. They can vary by company, but some are fairly common.

  • Limits on transfers: There will probably be a cap on how much of a balance you can transfer, usually in the neighborhood of $5,000, but some lenders will approve up to $15,000. This can be a one-time limit, commensurate with your credit limit, or it might renew monthly.
  • Timely payments: You might be declined for a balance transfer if you're behind on your payments with your current lender.
  • Cash back and rewards: You generally can't earn these on balances you've transferred, only on new charges and purchases.
  • Accounts with the same lender: You usually can't transfer balances between cards or accounts that are held with the same lender.

Getting Approved

Approval will depend on your credit history and score, as with any loan or credit application. Lenders typically look for scores over 700 for approval of a balance transfer, but what if you're considering this move because you're struggling a little financially in the first place?

A good rule of thumb is to give priority to any monthly bills that report to the credit agencies, such as auto loans, mortgage, credit cards, and the like. Utility companies typically don't report—although your service can be interrupted if you fall too far behind. But if it's just a matter of juggling bills for two to three weeks and trying to keep your credit score intact, put the gas bill on a side burner and concentrate on keeping your credit accounts current.

Thirty is the magic—or not so magic—number. Your credit score will definitely take a hit if you pay reporting creditors any later than 30 days. You don't want to make this mistake if you're riding the line with a close-to-acceptable credit score and contemplating a balance transfer.

Some Pitfalls

A balance transfer isn't as quick as making a credit card purchase. It could take a few days to several weeks for the transfer to process. Continue making regular monthly payments on your old credit card until your online account statement shows a zero balance, indicating that the transfer has officially occurred.

Don't ignore your billing statements before that time under the assumption that your balance has been transferred. You could miss a payment and end up with a late fee and late payment entries on your credit report if the transfer hasn't happened yet, and your payments are still due until it does.

It could take you longer to pay off a balance transfer if your new credit card balance includes purchases. Credit card issuers generally apply any above-minimum payments to the balance with the lowest interest rate until that balance has been completely repaid. You'll typically only pay interest on the balance transfer until the lower rate balance has been paid off.

Some lenders will cancel your entire balance transfer agreement if you make even one late payment on your new account, and this can result in financial disaster.

When a Transfer Might Not Work

Let's assume that you owe $5,000 on one card with an APR of 17%. You're approved to transfer that balance to a card with a 12-month zero-interest introductory period. That's great—but maybe only if you can afford to pay the balance off within those 12 months.

That works out to payments of $416-plus for a year, and that might not be manageable if money is already tight. Otherwise, the transfer could well end up costing you more than if you had just left it on the old account, depending on the balance transfer fee and the new card's APR after the promotional period ends.

Let's say that the new card's regular APR is 25% after the introductory period and the transfer fee works out to an additional $250, or 5% of the amount you transferred. You would end up paying more on that loan in Year Two than you did before the transfer, assuming you don't make a significant dent in that $5,000 balance in the first year.

Paying Off a Balance Transfer

You'll save the most money on interest charges by paying the full balance during the promotional period. Divide the total balance by the number of months in the promotional period to figure out the monthly payment you need to make to pay off the balance and completely avoid any interest.