The Basics of Credit Card Balance Transfers Explained

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

credit cards that could be used for balance transfers
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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 that come along with the advantages.

Why Transfer a Credit Card Balance?

A credit card balance transfer allows you to move one card balance to another, less expensive credit card. The process is simple. When you apply, you also enter the details of the balance you want to transfer, including the account number and transfer amount.

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

Balance Transfer Card Fees & Features

Virtually all cards that offer balance transfers require that you pay a balance transfer fee, and most offer promotional zero or low-interest periods of various lengths, and these can be fairly similar. But you'll want to look beyond these factors. 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.

Equally important is the interest rate you'll be charged when the promotional period ends. Also evaluate other perks and features the issuer 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 as soon as 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, depending on the issuer.

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 debt you can transfer, usually in the neighborhood of $5,000, but some lenders will approve more. 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 cash back or rewards points 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.

Some Balance Transfer Pitfalls

A balance transfer doesn't process as quickly as 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 might take you longer to pay off a balance transfer if your new credit card balance includes purchases. Credit card issuers generally apply amounts greater than the minimum due to the balance with the highest interest rate until that balance has been completely repaid. After that payments in excess of the minimum would apply to the balance with the next highest interest rate, and so on.

Let's say you have a credit card with a $1,000 balance: $500 of the balance is purchases you made at 20% APR, and the other $500 is a balance transfer at 0% APR. Let's also say your minimum payment is $25. If you make a $100 payment, the first $25 will be applied to the balance transfer and the remaining $75 would be applied to the more expensive purchases balance. That could delay the ultimate pay-off date for your transferred balance.

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 monthly payments of $416-plus for a year (not including a balance transfer fee), and that might not be manageable if money is already tight. Otherwise, the transfer could 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 the second year than you did before the transfer, assuming you don't make a significant dent in that $5,000 balance in the first year.

Article Sources

  1. Consumer Financial Protection Bureau. "Regulation Z: 1026.53 Allocation of Payments."