What Is a Balance Transfer?

Credit Card Changes that Might Benefit You in a Recession
Key Takeaways:
  • Balance transfer means using a new credit card with a low introductory rate to pay off one or more account balances with higher interest rates.
  • Use a balance transfer only if you can stop adding to your credit card balances. Running your cards back up after transferring a balance will leave you worse off.
  • Before applying for a balance transfer card, create a plan for paying off the debt, preferably before the introductory period ends and the card’s interest rate increases.

What is a balance transfer? “Balance transfer” means using a credit card with a low introductory interest rate (even 0%) to pay off one or more accounts with higher interest rates. 

  • Introductory periods range from six months to about 24 months

  • Balance transfer fees are usually 1% to 5% of the amounts transferred.

  • You may be able to consolidate multiple accounts and make fewer payments each month.

When comparing balance transfer cards, consider the introductory rate, the length of the introductory period, and the balance transfer fee.

How Does a Balance Transfer Work?

When you see a credit card with a balance transfer offer, what exactly does that mean?

Well, that part is pretty simple. It’s an opportunity to transfer some of your existing debt from one credit card to another. 

The big question is: why would you do that?

A great reason to transfer a balance from one credit card to another is to save money on interest payments. Balance transfer cards specialize in making it easy to save money this way by offering special low interest rates for a limited time after you sign up for the card.

How low is low? Some balance transfer credit cards actually offer a 0% interest rate for an introductory period. 

According to the Federal Reserve’s Consumer Credit survey, as of late 2021 the average rate being charged on credit card balances was 17.13%. Naturally, if you could lower that to 0%, you’d save money.

How much money? Here’s a typical example:

  • According to the Fed’s Survey of Consumer of Consumer Finances, the average family with a credit card balance owes $6,300. 

  • At the average credit card rate of 17.13%, that balance would cost $1,079 per year in interest.

  • If you did a credit card balance transfer in that situation, a 0% interest rate could save you that $1,079, minus the amount of any balance transfer fees..

Putting more of your money towards paying down debt instead of paying interest benefits you rather than the credit card company.

That kind of savings can be a big step towards getting out of debt. Just be aware that there is some fine print associated with balance transfer credit card offers:

  • The low introductory interest rate is for a limited time

  • There is almost always a one-time fee on any balance you transfer

Those limitations don’t stop balance transfer offers from being a good opportunity. They just mean you need to think through whether they will help in your situation, and shop for the deal that’s best for you.

When Does a Balance Transfer Make Sense?

To figure out if a balance transfer offer makes sense for you, ask yourself four key questions:

  1. Do you regularly carry a credit card balance? The Fed found that nearly half (45.4%) of American families do carry an ongoing credit card balance. If you do, chances are you’re paying a high interest rate on that balance.

  2. Could you get a lower interest rate from a credit card balance transfer? Since some balance transfer offers include a 0% introductory period, chances are you could lower your rate, at least temporarily.

  3. Does the amount you’d save on interest exceed the amount of any balance transfer fees? This may not be as simple as comparing your current interest rate to the balance transfer rate. You might have to reduce that difference if the low-interest introductory period on the balance transfer card is less than a year or if you would have paid your balance off in less than a year anyway.

  4. Could you pay down a significant portion of your balance by the end of the low-interest introductory period? Balance transfer offers work best if you use them to reduce the amount of debt you carry. Otherwise you’d have to make sure you didn’t end up paying a higher rate at the end of the introductory period.

If you can answer “yes” to the first three of the above questions, there’s a good chance a balance transfer card could save you money. If you can answer “yes” to all four questions, then it should be a slam-dunk in your favor. 

What Kind of Debt Can You Transfer?

Reducing your interest rate can be an important step towards getting rid of debt. And this doesn’t just apply to credit card debt. Consider using a balance transfer to pay off car loans, personal loans, and even student loans whenever you can save money (factoring in the balance transfer fee).

However, when using a balance transfer to pay off other forms of debt, it’s especially important to have a plan for paying off the debt before the introductory interest rate period expires. Credit cards typically have higher interest rates than most loans, so you may end up paying more interest rather than less on any balance you still have at the end of the introductory period. 

How to Shop for a Balance Transfer Card

The key to a balance transfer card is how much money it can save you by allowing you to transfer existing debt onto it. So, when shopping for a balance transfer card, you should focus on features that affect your money-saving potential.

There are a few features that affect the money-saving potential of a balance transfer credit card:

  1. The introductory interest rate. What you’re looking for: as low a rate as possible -- preferably 0%. That’s what can free you from paying interest for a time while you pay down your debt.

  2. The length of the introductory period. Since the introductory interest rate is temporary, you should look at how long it will last. The longer the card will have that special low rate, the more chance you have to benefit.

  3. Balance transfer fees. Most (if not all) cards charge a one-time fee on any balance transferred onto them. The fee ranges between 1% and 5%, with 3% being typical. This cuts into the savings you would get from the low interest rate. You need to compare how much you would save in interest with how much you would pay in fees.

  4. Other fees. Look for fees in addition to the balance transfer charge because they will also reduce your savings.

  5. Ongoing interest rate. Even though a special rate will apply during the introductory period, you should also take a look at the ongoing rate. This only matters if you don’t pay your balance off by the end of the introductory period, or if you keep using the card and tend to carry a balance.

How to Pay Off a Balance Transfer

Balance transfer cards work best if you pay off your debt by the end of the introductory interest rate period. 

Here are some tactics you can use to save the most with a balance transfer card:

  1. Pay as much as you can each month. Credit cards generally demand only a small payment each month. However, paying the minimum means it will take you a long time to pay off your debt -- probably much longer than the introductory interest rate period. Use the money you’re saving on interest to make bigger payments. 

  2. Limit new spending on the card. It’s hard to get anywhere if you’re paying down your balance but then replacing it with new charges. If a goal in getting a balance transfer card is to pay down debt, reining in spending must be part of the program.

  3. Make a plan to pay off the balance by the end of the introductory period. Divide the amount of your balance by the number of months in the introductory period to see how big a monthly payment you’d have to make to pay off that debt before you’d to start paying interest on it.

  4. Consider cheaper forms of credit at the end of the introductory period. If you haven’t paid off your balance by the time the special low interest rate expires, there may be cheaper forms of debt to carry. Depending on your financial situation, using a personal loan for balance transfer payment could get you a lower interest rate after the introductory period. 

Balance Transfer Dos and Don’ts

Do: Look for a balance transfer card with a 0% introductory period.

Don’t: Neglect to compare the length of the introductory period, and not just the interest rate.

Do: Compare fees alongside interest rate savings.

Don’t: Use your interest savings simply to spend more. New purchases may not be eligible for the low introductory interest rate.

Do: Make a plan to pay off your balance by the end of the introductory period.

Don’t: Simply carry a balance on the card after the introductory period; look for cheaper forms of credit like another balance transfer card or a personal loan.

Balance Transfer FAQs

How does a balance transfer affect your credit score?

There will probably be two effects – a reduction at first, followed by a larger improvement. Credit inquiries hit your credit score by three-to-five points each. However, increasing your available credit can increase your score significantly by lowering your utilization ratio. If you have $5,000 in available credit and use $2,500, your utilization ratio is 50%, and that’s pretty high. But by transferring your balance to a new card with a $5,000 limit, your utilization drops to 25% ($2,500 of $10,000 available credit). And when you pay off all your credit card debt, the ratio drops to zero.

How much can you pay off with a balance transfer?

This will depend on your credit limit, which the credit card company determines from your financial situation. Some cards may allow you to transfer only some portion of your credit limit. Also, note that if there is a balance transfer fee, this may offset  the amount you can transfer.

How many balance transfers can you do?

You should be able to make multiple transfers, though fees and minimum transfer amounts may impact how many transfers are practical. In addition, opening new credit again and again will take a toll on your credit score and eventually you’ll stop getting approved for new accounts.