Paying Off Debt With a Balance Transfer

What Is a Balance Transfer?

A balance transfer involves moving an existing credit card balance from one card to another. It can be an effective way to pay down expensive credit card debt and save on interest. But there are also some pitfalls to consider before you make the move.

How Balance Transfers Work

Say you’ve accumulated a large balance on a credit card with a high annual percentage rate (APR). If you transfer that balance to a new card with a lower interest rate, then a greater portion of your future payments can go toward paying down principal rather than paying interest. That will allow you to pay off your balance more quickly and potentially save you a significant amount of money in the long run.

The first step is applying for a balance transfer credit card. Once you’ve been accepted, you can initiate the transfer of all or part of your balance from your old card. There are several ways to do that. One is to write a check supplied by your new card company to pay off the old debt. You also may be able to initiate the transfer by phone or online, by giving your new card company the account number and other information for your old card and indicating how much debt you want paid off and transferred to your new card.

On average, a balance transfer takes about two weeks. During that time, you’ll still have to make any payments you owe to the card company that currently holds your balance before it transfers to the new card.

Is It Wise to Pay Off Debt With a Balance Transfer?

Many credit card companies offer cards with very low interest rates on balance transfers if you have a good credit score. Some also have 0% introductory interest rates for a period of time, often six to 18 months.

While that can save you money if you qualify, there are a couple of things that you need to watch out for in shopping for a balance transfer card.

The first is transfer fees. Not all cards charge them, but those that do often have fees in the range of 3% to 5%. So, for example, if you’re transferring a balance of $5,000, then it could cost you $150 to $250 right off the top.

The second is what happens to the card’s interest rate after the promotional period (if any) ends. If you haven’t paid off your balance by then, you may find yourself paying a higher interest rate on it than you were with your old card.

Still, if you are able to find a new credit card with a very low interest rate, a low- or no-balance transfer fee, a credit limit high enough to accommodate your previous balance, and an introductory period long enough to pay off that balance before the rate increases, then a balance transfer can be a smart move.

An Example of a Good Balance Transfer

Say you have a $3,000 balance on a credit card with a 15% interest rate. If you pay $250 per month, then it would take 14 months to pay off the balance plus $271 in interest. However, if you transferred that balance to a 0% interest card with a 3% transfer fee and made the same payments, then it would take only 13 months to pay off (including the $90 transfer fee), saving you $181.

Applying for a Balance Transfer Card

Before applying for a new card, make sure you know all of its terms, which the credit card company is required to publish on its website. Those terms include the interest rates for balance transfers and new purchases, as well as how long any introductory rate lasts.

When in doubt, contact the issuing company for the card you want. Know your FICO score before you call, and be ready to discuss any negative items in your credit report. With this information, the customer service representative can tell you about the offers that are available to you.

Investopedia publishes regularly updated lists of the best balance transfer credit cards.

Alternatives to Paying Off Debt With a Balance Transfer

While a balance transfer can be a good way to pay off debt, it isn’t the only way.

One alternative is simply to earmark more money each month to paying down your credit card balance. If you have multiple cards, then pay at least the minimum due on each one and put any additional cash toward the card with the highest interest rate. Once that card is paid off, move on to the next most expensive card. This is sometimes referred to as the debt avalanche method.

Another alternative is to apply for a debt consolidation loan at your bank. A debt consolidation loan is a type of personal loan that often carries a lower interest rate than credit cards charge. You can use the loan to pay off your credit cards or other debts. Investopedia publishes a regularly updated list of the best debt consolidation loans.

If you’re having serious trouble making even the minimum payments on your card (or cards), then consider asking for debt relief. That involves contacting your creditors and trying to negotiate new, more favorable terms, such as a lower interest rate or more time to repay. You can negotiate on your own or hire a reputable debt relief company to assist you. Be aware that there are con artists who pose as legitimate debt relief companies, so be sure to check out any company that you’re considering. Investopedia also publishes a list of the best debt relief companies.