What does a balance transfer on a credit card mean? Simply, it means moving the outstanding debt from one piece of plastic to another card, usually a new one. Credit card balance transfers are typically used by consumers who want to move the amount they owe to a credit card with a lower interest rate, fewer penalties or benefits, such as rewards points or travel miles.
Many credit card companies offer free balance transfers in order to entice people to choose their products over a competitor's. As an additional sweetener, they often offer a promotional or introductory period of anywhere from six to 21 months (federal law requires at least six), in which no interest is charged on the transferred sum. With proper diligence, savvy consumers can take advantage of these incentives and avoid high interest rates while paying down debt. But they need to study offers carefully, as many credit transfers involve unexpected charges and other conditions that impact those great-sounding terms.
How to Do a Credit Card Balance Transfer
If you've been approved a new credit card with a 0% interest balance transfer offer (and make sure that anyone who is approved for the card will get the 0% rate, or if it depends on a credit inquiry) here are the steps you’ll want to take before you actually make the move, and the steps for completing the transfer.
1. See where you stand and choose balances to transfer.
List all of your credit cards, their balances and their interest rates. Choose one or more cards with high rates whose balances you’d like to transfer to save money on interest. The balance doesn’t have to be in your name to qualify for a transfer, so if your new spouse has a high-interest credit card balance and you have excellent credit, you might use a 0% offer to help pay off his or her old balance and start over together debt-free.
2. Calculate your balance transfer fee.
Note the balance transfer fee if there is one, and calculate how much you’ll pay on the amount you want to transfer. The fee is typically 3% to 5%, meaning you’ll pay $30 to $50 or every $1,000 you transfer. Even with the new, lower interest rate, will you still come out ahead after the balance transfer fee? Use an online balance transfer calculator to do the math.
Also note if there's an amount cap on the fee. If so, that can really make transferring larger balances worthwhile. Say, for example, there's a balance transfer fee of 3%, up to a maximum of $75. You transfer a balance of $5,000 – but because of the cap, you don't pay $150 (3% of $5,000) but $75: an effective interest rate of only 1.5%.
3. Understand the penalties.
After the transfer, you can’t just forget about the balance and let it sit there for a year. You still have to make the minimum monthly payment on the card before the due date to keep that 0% rate. If you miss one, the balance may immediately start incurring interest. Pay attention to the interest rate you’ll pay: Will it be a default rate that’s higher than what you’re paying now? Similarly, if you default under any of the cardholder agreements, such as making payments late, going over your limit, or bouncing a check, the interest rate can jump to a penalty rate which could be as high as 30%.
4. Know when the promotion ends and what happens when it does.
The 0% rate is usually valid for 12 or 18 months. If you’re planning to pay off a transferred balance during an introductory period, calculate whether you’re likely to be able to pay it in full during that time. If not, what interest rate will you pay when the introductory period ends, and will you still come out ahead? Don’t expect a reminder from the credit card company that your promotional rate is ending, by the way: It's hoping that you'll miss the deadline and have to start paying interest on your balance.
5. Check the time limit for completing the transfer.
If you’re getting a new credit card account, the terms will require you to complete the balance transfer within a certain number of days (usually one to two months) to receive any promotional rate. Read the fine print carefully to see how big that window of time is. Complete the transfer the day after that window closes and you’ll pay the regular interest rates.
6. Make sure you meet the basic requirements for the balance transfer.
Generally, you cannot do a credit card balance transfer if your new account is with the same company as the card whose balance you want to pay off – for example, you cannot transfer a balance from one Citibank credit card to another. Also, if you have a past-due payment with the creditor to which you want to transfer the balance, or if you have filed for bankruptcy, your transfer request may be declined.
7. Decide how much to transfer.
Check the credit limit on your new card: You can’t request a balance transfer for more than your available credit line, and balance transfer fees count toward that limit. For example, if you have $10,000 in available credit, you won’t be able to transfer a $10,000 balance with a 3% balance transfer fee; you’d need to have $10,300 in available credit to complete the transaction. The most you’ll be able to transfer is around $9,700.
8. Decide where you want the balance transfer funds to go.
Do you want them to go directly to another creditor to pay off your balance? Do you want the funds deposited to your bank account so you can pay off other debts? In the latter case, make sure the credit card explicitly states that having funds deposited to your bank account will not be considered a cash advance. If you accidentally take out a cash advance, you’ll pay interest on the transaction immediately, and usually at a high rate.
9. Request the balance transfer with your new creditor by following its specific instructions.
Although it's called a balance transfer, what's actually happening is you are using one credit card to pay off another one. The mechanics look something like this:
Balance transfer checks: The new card issuer (or issuer of the card you're transferring the balance to) gives you checks. Simply make the check out to the card company you want to pay. Some credit card companies will even let you make the check out to yourself, but again, make sure this won’t be considered a cash advance.
Online or phone transfers: Have the name, payment address and account number for the balance you’re paying off, with the amount you want to transfer.
For direct deposit: Have the bank account and routing number of the account into which you want to deposit the balance transfer funds.
10. Watch your old and new accounts.
You might inquire, if it's not stated anywhere, about the transfer timeframe. In any event, allow at least two to three days – and up to 10 days – for your new creditor to pay off your old creditor. Eyeball each old account whose balance you’re paying off to see when the balance transfer clears. In the meantime, don’t miss any payment deadlines on those accounts so you don’t incur any late fees. Keep an eye, too, on your new account to see when the balance has transferred over, especially if you want to use the card to make purchases.
Balance Transfer Math
No doubt about it, a transfer can save you money. Say you have a $5,000 balance on a credit card with a 20% APR. Carrying that balance is costing you $1,000 a year at this rate. Then, you get a balance transfer offer on a new credit card, with terms of 0% interest for 12 months. You can move your $5,000 balance to the new card and you’ll have a whole year to pay it off with no interest. You just have to pay a 3% fee to transfer the balance, which amounts to $150. Even after the fee, you’ll come out way ahead by not paying interest for a year, as long as you put about $415 per month toward your $5,000 balance so that it’s paid in full by the end of the promotional period.
What about transferring a balance if there's no 0% interest rate offer – is it worth the time and hassle? It can be, but do the math first. Say you have a $3,000 balance with a 30% interest rate. At 30% APR, you’re currently paying $900 a year in interest. You see a card with a 27% APR, and a 3% transfer fee. Transferring your balance means you’d be paying $810 in interest a year; add on the $90 balance transfer fee, and it's up to – guess what – $900 a year. You’d about break even after a year. In this example, to come out ahead, you’d need to look for a deal where the APR is less than 27%. A better plan might be to ask your card issuer for an interest-rate reduction to 27%, so you don't incur a fee.
A Loss of Grace
While these credit card balance transfer offers look great on the surface, people who take advantage of them might find themselves on the hook for unexpected interest charges. The problem is that transferring a balance means carrying a monthly balance, and carrying a monthly balance – even one with a 0% interest rate – can mean losing the credit card’s grace period and paying surprise interest charges on new purchases.
The grace period is the time between when your credit card billing cycle ends and when your credit card bill is due, during which you don’t have to pay interest on your purchases. By law, it must be at least 21 days. You only get the grace period if you aren’t carrying a balance on your credit card. What many consumers don’t realize is that carrying a balance from doing a promotional balance transfer affects the grace period.
With no grace period, if you make any purchases on your new credit card after completing your balance transfer, you'll rack up interest charges on those purchases from the moment you make them. When that happens, some of the money you’re saving by having a 0% interest rate on the balance transfer will go right back out of your pocket.
A Tough Balancing Act
Let's say you need to fork over $150 for toilet paper, paper towels and other household essentials during a routine shopping trip and you charge it to your new card, the same card to which you’ve transferred the balance.
You assume that, if you pay the full $150 when your bill comes due in three weeks, you won't owe any interest on the purchase – after all, you just made it. But when your credit card statement arrives, you find you’ve been charged 15% APR – your new card’s interest rate on purchases – on your $150 purchase. It’s a small amount, but there’s the principle of the thing: If you’re going to pay interest or fees to a credit card company, you want to do it knowingly, not because the company caught you off guard.
It gets worse. In your mind, the amount you owe for the balance transfer and the amount you owe for purchases are separate. Just send in your payment for $150 plus the $1.25 or so in interest, and you’ve got your grace period back and everything is fine, you think. But if your credit card company applies payments to the lowest-interest balances first, your $151.25 will go toward your balance transfer amount, and your $150 purchase will keep sitting there accruing interest at 15% until you pay off your entire balance transfer, your purchase and all the interest you’ve accrued. Plus, any more new charges will start incurring interest from the day you make them.
The only way to get the grace period back on your card and stop paying interest is to pay off the entire balance transfer, as well as all your new purchases. And if you had enough cash saved up to do that, you probably wouldn’t have done the balance transfer in the first place.
Balance Transfers to Existing Cards
You don't have to open a new account to do a credit card balance transfer; you can do it with an existing card, especially if the issuer is running a special promotion. Transferring a balance over to a lower interest rate card is often a good idea; even if your balance isn't paid off before the promotional rate expires on the balance transfer, the remainder will be paid off at a lower interest rate.
However, it can be tricky if you already have a balance on the card to which you are transferring more debt. Suppose that you owe $2,000 on your credit card with a 15% annual percentage rate (APR) before you transfer a balance of $1,000 from your second card. The balance transfer rate you are offered is 0% for six months. You pay off $1,000 in six months, but because the 0% portion of your credit card debt is paid first, you will be charged at the 15% APR rate for six months for the $2,000 that was untouched by payments. Meanwhile, the card you transferred $1,000 from has a rate of 12% APR, representing a loss of 3% for you. You could cost yourself money in interest paid and transfer charges by using a balance transfer offer in these circumstances.
You also need to consider what adding a big sum to a card will do to your credit utilization ratio – that is, the percentage of a consumer’s available credit that he or she has used – which is a key component of your credit score. Say you have a card with a $10,000 limit with a $1,250 balance. You are using 12.5% of your credit limit. Then you transfer $5,000, creating a total balance of $6,250. You are now using 62.5% of your credit limit. This 50% increase in your balance on one card could hurt your credit score, and ultimately cause the interest rate to rise on this and other cards.
Balance Transfer Vs. Personal Loan
Some financial advisors feel credit card balance transfers only make sense if you can pay off all or most of the debt during the promotional rate period. After the promotional period ends, you are likely to face another high interest rate on your balance, in which case a personal loan – whose rates tend to be lower, and/or fixed – is probably the cheaper option.
However, if the personal loan has to be secured, you may not be comfortable pledging assets as collateral. Credit card debt is unsecured, and if you default on it, it's unlikely that the card issuer will sue you and come after your assets. That changes when you open a secured personal loan; the company can take the asset to recoup its loan if you can't make the payments.
Where to Look
If you’d like to do more research, there are several credit card comparison websites that can help you find the best balance transfer credit card for your situation:
The chart below outlines top balance transfer promotions offered by card companies, based on the length of the 0% APR offer period and the sizes of the transfer fee and post-promotion transfer APR.
[Note: This is an interactive chart, so you can click on an individual card to get more details. Or, click on "View Full Comparison" to get even more information about how the cards compare.]
When consulting any credit card comparison website, be aware that these sites typically get referral fees from the credit card companies when a customer applies for a card through the website’s affiliate link and is approved. Take any rankings with a grain of salt, too. Also, some credit card companies have influenced the information that websites post about their cards in a way that means you might not be getting an accurate picture of a card’s costs. Be sure to read the fine print at the creditor’s website before you apply for any card.
The Bottom Line
Transferring a credit card balance should be a tool to help you get out of debt faster and spend less money on interest, without incurring charges or hurting your credit report. If you understand the fine print outlining the terms (sometimes these statements aren’t even in the credit card offer itself, but elsewhere on the credit card issuer’s website, such as in a help, FAQ or customer service area), do the math before applying to make sure you’ll come out ahead, and create a repayment plan you can stick with, grabbing a 0% interest offer on a new card could be a shrewd move. However, you might consider treating that transfer as a loan: Don't use the card for any purchases until you've completely paid off the balance transfer. If you want to be able to spend with it, then try to find a credit card that offers a 0% introductory APR for the same number of months on both balance transfers and new purchases.