What is a balance transfer credit card and how does it work?


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If you’ve ever watched in dismay as your credit card debt grew from manageable to unreasonable, you’re not alone. A Bankrate survey found that three in 10 households had more credit card debt than money in savings. Interestingly enough, one common tactic for getting out of credit card debt involves another kind of credit card.

Many credit card issuers offer balance transfer credit cards with introductory 0 percent APR periods that let you transfer existing debts to a new credit card and temporarily avoid interest charges. Every dollar you pay goes directly toward your transferred balance, giving you the opportunity to erase debt more quickly and improve your credit score.

Before you start shopping for a card, though, take the time to get familiar with the pros and cons and essential details of a balance transfer credit card.

What is a balance transfer?

A balance transfer involves moving debt from one credit account to another — in this case, to a balance transfer credit card. Most users transfer debt from one or more credit cards with large balances, but some issuers also let you transfer debt from loans and other types of credit accounts.

Since the average credit card annual percentage rate (APR) is over 16 percent, it often takes longer than anticipated for cardholders to pay down their debts — with significant sums of money paid to interest along the way.

Many balance transfer cards offer an introductory 0 percent APR period of at least six months, during which you can pay down your transferred balance without paying interest. The best balance transfer credit cards offer a 0 percent introductory APR on balance transfers for 15 to 20 months, giving you well over a year to pay off your transferred debt interest-free. Other balance transfer cards have low-interest introductory offers rather than zero-interest, but even a low-interest rate might be preferable to what you’re currently paying.

How do balance transfers work?

Requesting a credit card balance transfer usually takes a matter of minutes, whether you do it online or over the phone.

When you apply for a balance transfer credit card, you’ll be able to indicate which balances you’d like to transfer to the card upon approval. You’ll enter the account number from each credit account you’d like to transfer, as well as the amount of money you plan to move to your new balance transfer credit card. Make sure you have your credit cards’ balances and 16-digit numbers easily at hand before you begin.

You’ll likely need to pay a balance transfer fee of 3 to 5 percent on every balance you transfer to your new card. The balance transfer is typically paid upfront.

It generally takes between one week and one month to transfer a balance to a balance transfer card. Continue to make regular payments on all of your existing credit cards until you have confirmed that your balances have transferred in full and any final interest charges have been paid off.

How to do a balance transfer with different issuers

Each credit card issuer has a slightly different method of completing the balance transfer process. Here’s what you need to know:

Should you do a balance transfer?

Balance transfers have advantages and disadvantages. If you choose — and use — your balance transfer credit card wisely, you’ll be able to pay off your debt in full before the intro APR runs out. However, you could also find yourself in a situation where you don’t pay off your whole debt before the regular APR kicks in, which means you’ll be back to paying interest on your transferred balance.

Pros of balance transfers

  • Balance transfer credit cards typically let you avoid paying interest on your balances for 6 to 20 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.
  • 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.
  • Since you don’t have to pay interest for several months, balance transfer credit cards make it significantly easier to make a big dent in your debt in a relatively short amount of time.

Cons of balance transfers

  • Most balance transfer cards require you to pay 3 to 5 percent of your balance upfront in order to execute the transfer. A balance transfer fee can be well worth it when you consider the interest savings, but you should still factor them into your debt payoff plan.
  • Your balance transfer zero percent introductory APR offer will eventually end. If you don’t pay off the majority of your debt by the time your offer is over, you’ll find yourself back where you started — paying high-interest rates on your outstanding balance.
  • Moving credit card balances onto a balance transfer credit card can tempt you into putting new purchases on your balance-free cards. You may want to put those old credit cards aside until you’ve paid off your transferred balance.

How to choose a balance transfer credit card

Picking the right card for a credit card balance transfer takes a little time, but the process could help you avoid false starts and missteps along the way.

1. Take a close look at your debt

Before you get started with the balance transfer process, take a close look at all your debts to see how much you owe. Review your credit card balances as well as any other high-interest loans you have. From there, make a list of each debt you owe along with its respective interest rate or APR.

2. Check your credit score

Checking your credit score will help you narrow down your choices. Many of the top balance transfer cards are designed for people with good credit or excellent credit, but there are also balance transfer options available for people with less-than-good credit. The Discover it® Secured card, for example, offers an intro 10.99 percent APR on balance transfers for six months (22.99 percent variable APR thereafter). It’s not as useful as a 0 percent APR offer but still better than the interest you’re probably paying on your existing balances.

3. Compare cards and offers

When you shop around for a balance transfer credit card, you’re likely to see a lot of possible candidates early on. You can find many cards offered online by credit card issuers and marketplace websites. You might find offers through your bank or credit union.

The keys to narrowing down your choices include looking at:

  • Length and interest terms of introductory offer. The best offers usually have introductory zero interest periods lasting between 12-20 months. On a sliding scale, the less advantageous offers will last less than 12 months and could have introductory periods of low interest rather than zero interest.
  • Terms and conditions. You’ll find information about fees and other important details in the fine print. For instance, most offers specify that you have to complete the balance transfers within a certain time period after you open the account to receive the introductory interest rate.
  • Regular APR. It’s important to know how much interest you’ll be charged once your introductory APR period runs out. Compare these rates against current credit card interest rates to learn how each card’s APR stacks up against the average.
  • Rewards. Some balance transfer credit cards have rewards programs that earn cash back or points. Although you should make paying the balance your top priority, a card with a rewards program could prove useful in the long run.

4. Do a practice run

You can use Bankrate’s Credit Card Balance Transfer Calculator to get an idea of how the process might work with your current card and any balance transfer cards you’re interested in applying for. You’ll be able to see estimated interest payments and compare the timelines for paying off your debt.

Do balance transfers hurt your credit score?

A balance transfer could in fact improve your credit score. When you open a new line of credit, you’ll generally see your credit utilization ratio improve. Your credit utilization ratio, which compares your available credit to your current debt, makes up 30 percent of your credit score.

If you make regular monthly payments on your transferred balances without taking on any new debt, your credit utilization ratio will continue to go down — meaning your credit score should continue to go up. Plus, you’ll reap the credit-boosting benefits of all of those on-time credit card payments, which make up 35 percent of your credit score.

Some people take out balance transfer credit cards with good intentions but find themselves racking up new balances on their credit cards even as they work to pay their old balances off. If you’re not ready to commit to paying off your credit card debt without taking on new debt, a balance transfer credit card might not be the right option for you.

Balance transfer credit cards vs. personal loans

A credit card balance transfer might not be the best option in all cases. Here are some of the conditions that could make a personal loan more favorable than a balance transfer:

  • You have a larger debt. The amount of debt you can transfer to a balance transfer credit card typically can’t exceed your credit limit. For most consumers, the ceiling for balance transfers is about $10,000.
  • You have a lower credit score. Balance transfer credit cards generally require a good to excellent credit score. Good credit scores are preferred for loans, but bad credit loans are also available.
  • You need a longer payoff plan. The window for a zero-interest balance transfer can range anywhere from six to 20 months, while the payoff period for loans is typically measured in years, not months.

Here’s an important point to remember about loans. Interest rates on standard personal loans from banks and other financial institutions tend to be a lot lower than credit card interest rates. However, without an introductory zero interest rate and a longer payoff period, you won’t be able to avoid paying interest on a loan.

Like many decisions about personal finance, the question of balance transfer credit cards vs. loans involves trade-offs.

The last word on balance transfer credit cards

A balance transfer credit card can be a valuable tool if you’re struggling with high-interest debt. An interest-free solution to credit card debt could be a real money-saver. The key, however, is to pay off your transferred balance before the intro APR period runs out.

A balance transfer is not a get-out-of-debt-free card. You’ll still have to pay the money you owe, but a balance transfer credit card has the potential to give you a temporary shield against interest on the money you owe.