Whether you're opening a new credit card with a low promotional balance transfer rate, consolidating your debt onto one credit card with a lower rate, or need to transfer a balance from a credit card so you can close the account, you could consider a balance transfer. Only, you've never done one before and aren't sure what's involved.
A credit card balance transfer is when a cardholder transfers all or part of the balance from one credit account (such as a credit card or a line of credit) to another credit card account.
Typically, you’d want to use a credit card that offers a low introductory promotional interest rate (such as 0%) for a limited time for any balances transferred to that credit card. Sometimes, during a promotional period, these credit cards will have a lower interest rate than is charged on most credit cards. This promotional period is limited and designed to encourage customers to transfer balances from other credit products with a higher interest rate. There may also be a balance transfer fee associated with this low introductory rate -- which could be as low as 1% and as high as 5% of the amount of the balance that is transferred.
One thing to keep in mind is that after the promotional period is over, the interest rate that will apply to any balance you have transferred that remains unpaid, will increase to the cash advance rate that applies to your card.
What is a balance transfer credit card?
A balance transfer credit card is typically a credit card that offers a low or 0% interest introductory rate on new purchases and any balances you transfer to the card.
Credit card balance transfers themselves don't affect your credit, but if you apply for a new credit card to use it for a balance transfer, that requires a hard credit check, which might have a negative impact on your credit score. Similarly, if you transfer more than 35% of the credit limit on your new card (or your current balance plus the amount you’ve transferred is more than 35% of the credit limit), since you'll exceed the recommended credit utilization amount, it could also impact your credit score. If you're curious about how credit utilization ratio affects your credit score, you can learn about it and other factors that help increase your credit score.
There are a few downsides to transferring your balances too often. You could end up paying balance transfer fees each time you choose to make a transfer. You might also end up making too many credit inquiries if you're applying for new cards to transfer your balance too frequently. However, if you consider all your options, this strategy could also help you repay your debt much faster.
There are lots of advantages from transferring a credit card balance — including the thrill of potentially paying off your debt faster and paying less interest on that debt.
For example, if you get a new card where the lender offers a low or 0% introductory promotional interest rate for six months or the first year, transferring a balance to that credit card could save you money on interest and help you repay your debt faster.
If you’re wondering how that works, consider this example*:
Transferring $10,000 from a card that charges interest on that balance at the rate of 19.99% to a card with a one-year promotional rate at 0% will save you nearly $2,000 in interest that year.
Even if the card charges a 4% transfer fee, you'll still save $1,600. That could make a significant dent in your debt!
Based on the above example, depending on the payments you made on that card and activity on that card, you could then save on interest payments during the promotional six to 12 months. Many people use this no or low interest rate introductory offer period to repay more of their credit card debt.
*Example is for illustrative purposes only
Debt consolidation is when you use one credit vehicle to consolidate debt you owe across multiple credit products. In this case, you might use a credit card balance transfer to centralize debt you have on multiple cards onto one card.
Debt consolidation is usually done to reduce the interest you pay by consolidating your debt onto a credit product with a lower interest rate. But it has the added benefit of making paying your debt more convenient since you only have one bill to pay each month.
While the best way to do this is when you're opening a new card with a low introductory fee, there could be reasons to choose to consolidate debt to an existing credit card with a low rate or a new card without an introductory rate but with a lower rate than what you have on the other credit product.
This type of debt consolidation is only a good option if you find a credit card with a balance transfer interest rate that’s lower than your current credit card's normal interest rate. If there's a big enough difference in those rates, you could save money on interest even with the credit card balance transfer fee that applies with that transfer.
If you’re considering this option, you should look into how it will affect your credit utilization ratio (the 35%) and your credit score as a result.
Decrease your credit utilization
We can't all be credit wunderkinds. So, you might not have realized that using more than 35% of your credit limit on an account could negatively impact your credit score — even if you don't have a large amount of debt. But now that you do, what are you going to do about it? You could apply for an increase in your credit limit on the card with the high balance. If that doesn't work for you, you might consider transferring part of the balance to another card to distribute your debt on different cards.
But what about the downsides of balance transfers? While it offers an opportunity to help save on interest, there are other things to keep in mind.
Balance transfer fees
While not all credit cards charge balance transfer fees, many do. The fees average from 1% to 5% of the amount transferred and are charged to your card immediately with the transfer. So, you may have to start paying interest on those fees immediately. That can add up and might make the transfer cost more than the benefits that led you to want to make the transfer in the first place.
Higher balance transfer interest rates
Some lenders charge higher rates on balances transferred to the card versus their regular interest rate. For example, your credit card might charge a 20% on purchases, but 29% on balance transfers (or if your card includes balance transfers in the cash advance rate then 29% on your cash advances). Check with your card issuer the rate that will apply if you transfer a balance to your card (and see if you are eligible for a lower promotional rate on that transfer).
In addition, many cards won't put your payments towards your balance transferred amount. It’s a good idea to inquire about how payments are allocated on your card as this could affect how much interest you may pay on the transferred amount.
Limited period on your promotional rates
You might be planning to make progress on paying off your credit card balance during the limited time low or 0% promotional offer. However, while some can make a dent in their debt, not all will. After that welcome bonus period ends, you'll have to pay whatever higher rate applies to credit card balance transfers on that new card (at the balance transfer or cash advance rate that applies to your credit card). In which case, you might be better off refinancing your debt in other ways, like through a personal loan or a line of credit with a lower rate than a credit card.
New credit impact on your credit score
Opening a credit card just to transfer a balance onto it will require your issuer to get your consent for a hard credit check, which could have an impact on your credit score. While credit inquiries generally have a small impact and aren't long-lasting, if you plan on applying for a personal loan, auto loan or mortgage soon after, it may affect your credit score.
If you already have the card you want to transfer your balance to, then a balance transfer is relatively easy to do. However, we're going to assume that you don't so that we can walk you through the full process.
1. Check your terms
The balance transfer process starts by making sure you understand the terms of your current credit card. How much debt do you have on it? What are you paying in interest? These details will be key to making sure you choose a transfer option that will help save you money on interest.
2. Research balance transfer credit cards
Next, you need to look at the credit cards out there to see if you can find one that will either offer you a lower introductory rate for a limited period which is often between three months and up to a year or that offers you a much lower rate than your current card on all balances and debt including any you transfer over.
Some questions to consider before doing a balance transfer:
- What are the fees for making a credit card balance transfer?
- What is the credit card balance transfer interest rate?
- How much will you save on interest on your balance transfer during the introductory period?
- How much will you pay for your credit card balance transfer?
- How much will you pay after the introductory period is over?
Make sure that you'll actually be saving money on interest before you decide to make a credit card balance transfer.
3. Apply for a new credit card that can help you with a balance transfer
Once you've picked a card, you'll need to apply for it. Unsure if you'll qualify? Checking your credit score in advance can help you gauge your chances of being approved for a new credit card. Look for one that has an introductory interest rate on balance transfers or overall lower rate than your current debt.
4. Contact your new credit card issuer to discuss and do the transfer
Once you've been approved for a new card, the process is simple. You can usually do it over the phone or online. Just advise your financial institution of the amount you want transferred and your old account numbers. Your new credit card issuer will send your old financial institution where you have debt to cover the portion of the balance you're transferring to the new credit card issuer.
It takes anywhere from five to 14 days for the transfer to be completed. Make sure to continue to make at least your minimum payments on any balance at your old financial institution by the due date until the transfer is confirmed as it might span more than one billing cycle. If you don’t see the transfer on your new credit card after about 14 days, remember to follow up with your credit card issuer on the status of your transfer.
A credit card balance transfer can be an effective way to save money on interest. But before you decide to do one, it's important to understand the impact opening a new credit card will have on your credit score and your future interest rate that applies on any unpaid amount of your balance transfer, once the promotional period ends.