How does a balance transfer work?

3 min read

Credit card debt is a struggle for many American households. A Bankrate survey from February 2019 noted that three in 10 households have more credit card debt than money in savings. Since the average credit card APR is over 17%, cardholders are often stuck paying down their debt for longer than they want to—and with significant sums lost to interest along the way.

One common tactic for paying off debt is a balance transfer. Many credit card issuers offer balance transfer credit cards with 0% introductory APR periods that allow you to transfer various debts to a new credit card so you can pay down what you owe without added interest. Not paying interest on your credit card debts for 15 to 21 months means every dollar you pay will go toward reducing your revolving balance and get out of debt faster.

How to save money with a balance transfer

Let’s say you owe $4,000 in debt on a credit card with 19% APR and you’re currently paying $80 per month. Using our credit card payoff calculator, at this rate, it would take you 100 months (more than 8 years) to become debt-free. You’d also end up paying an extra $3,988 in interest along the way—almost double what you actually spent.

Now let’s imagine you found a balance transfer credit card that would grant you 18 months at 0% APR in exchange for a 3% balance transfer fee. Moving your balance over would cost you $120 in fees upfront, but you would have 18 months to pay off the debt without any interest.

If you continued paying $80 per month during that time, you could wipe out $1,440 of your balance within 18 months with zero interest paid. After the introductory period, the card’s regular variable APR would be in effect for your remaining balance of $2,560 (not including your balance transfer fee). If you continue to make the same monthly payment, and assuming an average APR similar to that on your original card, you’ll likely pay a little over $1,000 in interest as you chip away at the rest of the balance over the next 40+ months.

However, if during the introductory period you’re able to cut your expenses and bump your monthly payment up to $223, you could pay off the entire balance over 18 months without paying any further interest.

You can transfer balances from multiple credit cards to your new balance transfer credit card, although it’s important to keep in mind the credit limit on your new card and that a balance transfer fee will apply with each transfer. A balance transfer calculator is a great tool to determine if a balance transfer is right for you (and how to make the most of it).

Pros and cons of balance transfers

If you are tired of struggling with debt, a balance transfer could be exactly what you need to turn over a new leaf. Still, it’s important to know all the advantages and disadvantages of balance transfers before you dive in.

Pros of balance transfers

  • Save money on interest for a limited time: Balance transfer credit cards typically let you avoid paying interest on your balances for anywhere from 15 to 21 months. Since credit card interest rates tend to be high, avoiding interest for a long stretch of time can help you save significant sums of money.
  • Consolidate multiple monthly payments into one: A balance transfer credit card makes it easy to consolidate several credit card bills down to just one, which can simplify your financial life in a big way.
  • Get out of debt faster: Without having to pay interest on your balances for 15 to 21 months, balance transfer credit cards make it significantly easier to make a big dent in your debt in a short amount of time.

Cons of balance transfers

  • Balance transfer fees apply: While some balance transfer credit cards don’t charge a balance transfer fee, most require you to pay 3% or 5% of your balance upfront in order to execute the transfer. These fees can be well worth it when you consider the interest savings, but you should still know they exist. 
  • Introductory offers don’t last forever: As you consider balance transfer credit cards, keep in mind that these offers will eventually end. If you don’t pay off significant debt by the time your offer is over, you’ll find yourself back where you started — paying off your balance at a high interest rate.
  • You could be exposing yourself to more debt: Also keep in mind that opening a balance transfer credit card and moving your balances can tempt you into racking up more debt. You may want to hide your old credit cards in a safe or sock drawer so you’re not tempted to use them for purchases you cannot pay off.