How Credit Card Balance Transfers Work

And how to decide if getting one is the right step for you

Moving outstanding debt on one credit card to another card—usually a new one—is a balance transfer. Credit card balance transfers are typically used by consumers who want to move the amount they owe to a credit card with a significantly lower promotional interest rate and better benefits, such as a rewards program to earn cash back or points for everyday spending.

What is a balance transfer credit card? Some credit card companies waive balance transfer fees (which typically range 3%–5% of the transfer amount) to entice cardholders. Often, they might also offer a promotional or introductory period of six to about 18 months where no interest is charged on the transferred sum.

The challenge: Transferring a balance means carrying a monthly balance, and carrying a monthly balance (even one with a 0% interest rate) still involves making on-time payments of at least the minimum due on the transfer and for any new purchases. Otherwise you could end up losing the credit card’s introductory APR on your transferred balances along with any grace period—and incurring high interest charges (and potential penalty APRs) on new purchases.

With diligence, savvy consumers can take advantage of these incentives and avoid high interest rates while paying down debt, but you need to study these offers carefully.

Key Takeaways

  • Credit card balance transfers are typically used by consumers who want to save money by moving high-interest credit card debt to another credit card with a lower interest rate.
  • Balance transfer credit card offers typically come with an interest-free introductory period of six to 18 months, though some are longer.
  • Many credit transfers involve transfer fees and other conditions.
  • Any violation of the cardholder agreement can potentially nullify the introductory APR and trigger penalty rates to be applied.

What Is the Schumer Box?

What to Look for in a Balance Transfer Card

Balance transfers can save money. Say you have a $5,000 balance on a credit card with a 20% annual percentage rate (APR). At that rate, carrying that balance and paying $250 a month would require 24 months to pay off and cost $1,134 in interest. After securing a 12-month 0% balance transfer on a new credit card and moving the $5,000 balance, the cardholder gets a year to pay it off with no interest and just a fee to transfer the balance.

But details and costs associated with these transfers are numerous. After the transfer, for example, you still have to make the minimum monthly payment on the card before the due date to keep that 0% rate. And pay attention to the interest rate. Does the new card have a regular interest rate that’s higher than the interest the balance incurs on your current card?

Similarly, a default under any of the rules of the cardholder agreement—such as making payments late, exceeding the credit limit, or bouncing a check—can make the interest jump to a penalty rate as high as 29.99%. The 0% rate is usually valid for 12 or 18 months, sometimes more. Can you pay off the transferred balance during that period? If not, what interest rate kicks in afterward? (And don’t expect a reminder from the credit card company about when the promotional rate is ending, although they are required by law to show that information on your credit card statement.)

Potential Pitfalls

With accounts that involve a new credit card, the terms will require the cardholder to complete the balance transfer within a certain time (usually in the first two months) to receive the promotional rate. The day after that window closes, regular interest rates begin. Also, credit card companies do not allow existing customers to transfer balances to new accounts that they also issue.

A history of past due payments, a low credit score or a bankruptcy filing by the cardholder, may also result in decline of the transfer.

Transferring a balance if there's no 0% or low-rate interest rate offer can work, but do the math first. Say you have a $3,000 balance with a 30% interest rate, which translates into $900 a year in interest. Transferring the balance to a card with a 27% APR and a 3% transfer fee means paying $810 in interest a year, plus a $90 balance-transfer fee. You would break even only after a year.

To come out ahead in this example, you need a deal where the APR is less than 27%. A better plan might be to ask the existing card issuer for an interest-rate reduction to 27% or less, saving the balance-transfer fee.

During the current coronavirus crisis, credit card companies are offering assistance for cardholders who are experiencing financial hardship. Card issuers are encouraging cardholders who find themselves in this situation to call the number on their card to speak with a representative about options such as lowering their interest rate, deferring payments, or avoiding late fees.

Where to Look

If you are consulting a 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 and is approved. Also, some credit card companies have influenced the information that websites post about their cards in a way that distorts the picture of a card’s costs.

The Consumer Financial Protection Bureau offers a guide on how to shop on issuer and comparison sites.

How to Do a Credit Card Balance Transfer

How do credit card balance transfers work? After getting approval for a card with a 0% interest balance-transfer offer, find out whether the 0% rate is automatic or depends on a credit check. The next step is determining which balances to transfer; cards with high interest rates should come first. (The balance doesn’t have to be in the cardholder's name to qualify for a transfer.)

Next, calculate the transfer fee, which is typically 3% to 5% ($30 to $50 for every $1,000 transferred). Is there an amount cap on the fee? If not, that can make transferring larger balances worthwhile. Also check the credit limit on your new card before you initiate a transfer. The requested balance transfer cannot exceed the available credit line, and balance-transfer fees count toward that limit.

Requesting the Transfer

Although it's called a balance transfer, one credit card actually pays off another. The mechanics include:

Balance-transfer checks

The new card issuer (or issuer of the card to which the balance is being transferred) supplies the cardholder with checks. The cardholder makes the check out to the card company they want to pay. Some credit card companies will let the cardholder make the check out to themselves, but make sure this will not be considered a cash advance.

Online or phone transfers

The cardholder gives the account information and amount to the credit card company to which they are transferring the balance and that company arranges the transfer of funds to pay off the account. If, for example, you are paying off a $5,000 balance on your high-interest Wells Fargo Visa card and transferring that balance to a Citi MasterCard with a 0% offer, you would provide Citi with the name, payment address, and account number for your Visa card, and indicate that you want $5,000 paid to that Visa account.

Beware the Grace Period

People who take advantage of these offers sometimes find themselves on the hook for unexpected interest charges. The problem is that transferring a balance means carrying a monthly balance. Carrying a monthly balance by not paying off the minimum amount due each month—even one with a 0% interest rate—can mean losing the card’s introductory APR, its grace period and paying surprise interest on new purchases.

The grace period is the time between the end of the credit card billing cycle and the due date of the bill. During that period (by law, at least 21 days but more often its 25 days) a cardholder doesn't have to pay interest on new purchases. But the grace period only applies if a cardholder is carrying no balance on the card. What many consumers don’t realize is that carrying a balance from a promotional balance transfer can affect the grace period if minimum payments aren't made each month.

With no grace period, purchases on the new card after completing the balance transfer rack up interest charges. One good change: Since the Credit Card Accountability, Responsibility and Disclosure Act of 2009, credit card companies can no longer apply payments to the lowest-interest balances first; they now have to apply them to the highest-interest balances first.

All the same, the Consumer Financial Protection Bureau says many card issuers don't make their terms clear in their promotional offers. Issuers are required to tell consumers how the grace period works in marketing materials, in application materials, and on account statements, among other communications. 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.

Also bear in mind that many offers stipulate that the cardholder's credit score determines the actual number of months of 0% balance transfer in the introductory period.

If the terms of the grace period for purchases after a transfer are unclear, options are to pass on the offer and look for one with clearer terms; take the 0% balance transfer offer, but don't use the card for any purchases until the balance transfer is paid off; or choose a credit card that offers a 0% introductory APR for the same number of months on both balance transfers and new purchases.

The only way to get the grace period back on a credit card and stop paying interest is to pay off the entire balance transfer, as well as all new purchases.

Transfers to Existing Cards

Balance transfers can also be done with an existing card, especially if the issuer is running a special promotion. This can be tricky, however, if the existing card already has a balance that the transfer will only increase.

Suppose a cardholder owes $2,000 on a card with a 15% APR before they transfer a balance of $1,000 from a second card. The balance transfer rate offered is 0% for six months. The cardholder pays off $1,000 in six months, but because the 15% portion of the credit card debt is paid first, the 15% APR rate for six months applies to the $2,000 that was untouched by payments. Meanwhile, the card the $1,000 was transferred from has an APR rate of 12%, representing a loss of 3%.

Also consider what adding a big sum to a card will do to the credit utilization ratio—that is, the percentage of available credit that's been used—which is a key component of your credit score. Say you have a card with a $10,000 limit and a $1,250 balance. You are using 12.5% of your credit limit. If you then transfer $5,000, creating a total balance of $6,250, you're now using 62.5% of your credit limit. This increase in a balance on one card could hurt your credit score (as it is recommended to keep utilization below 30%) and ultimately cause the interest rate to rise on this and other cards. This may, of course, be mitigated by the $5,000 lower balance on the higher-interest card from which the transfer was made.

Personal Loan Comparison

Some financial advisors feel credit card balance transfers make sense only if a cardholder can pay off all or most of the debt during the promotional rate period. After that period ends, a cardholder is likely to face another high interest rate on their balance, in which case a personal loan—with rates that tend to be lower, or fixed, or both—is probably the cheaper option.

If the personal loan has to be secured, however, the cardholder may not be comfortable pledging assets as collateral. Credit card debt is unsecured, and in the event of default the card issuer can't come after cardholder assets. With a secured personal loan, the lender can take assets to recoup losses.

The Bottom Line

Transferring a credit card balance should be a tool to escape debt faster and spend less money on interest without incurring charges or hurting your credit rating. After understanding the fine print of the terms, doing the math before applying, and creating a realistic repayment plan (one that pays off the balance transfer before making new purchases), taking advantage of a 0% introductory interest offer on a new card could be a shrewd move. So long as you do your research, you shouldn't have any trouble finding the right balance transfer card for you.

Article Sources
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  1. Consumer Financial Protection Bureau. "Credit Card Debt During Coronavirus: Relief Options and Tips."

  2. Consumer Financial Protection Bureau. "How to Find the Best Credit Card."

  3. Federal Trade Commission. "Credit Card Accountability Responsibility and Disclosure Act of 2009," Page 9.

  4. Consumer Financial Protection Bureau, "CFPB Bulletin 2014-02: Marketing of Credit Card Promotional APR Offers," Page 5.