How to Do a Balance Transfer

Transferring credit card balances to a new card can potentially save you thousands of dollars in interest, thanks to 0% promotional interest rates that many of the major credit card companies offer. In fact, they are the only way to refinance debt at a 0% interest rate, helping you pay down debt faster by avoiding interest on your balances.

Here's how to do a balance transfer, and what to consider before transferring a balance.

Find a good rate

While you may occasionally receive a letter in the mail about a balance-transfer offer on a credit card you already have, the best offers typically come from opening a new credit card account. The best balance-transfer credit cards currently offer 0% promo APRs for as many as 21 billing cycles. Some even waive balance-transfer fees on the amounts transferred.

Low-interest-rate balance transfers are a marketing expense for the bank. In the worst case for the bank, you'll use the balance transfer responsibly and pay off your balance before the 0% promo period expires. In the best case for the bank, you'll pay down very little of the balance during the promo period and then start paying the standard rate of interest, which can be 18% or more. A bank is very happy to give up a year of interest on a $5,000 balance if it means the bank collects 18% per year ($900) in interest every year thereafter.

Of course, some people will use their balance transfers responsibly and never pay a dime in interest to the bank. But it only takes a handful of people who don't pay off their balance transfers before the end of the promotional period for the bank to make money on the offer. 

We take the view that balance-transfer cards can be a great deal for people who understand their limitations (the 0% period does come to an end) and who are dedicated to paying off their debt once and for all. Its a lot easier to pay off debt when you aren't being charged interest than it is to pay off debt when interest is piling up at a double-digit rate.

Image source: Getty Images.

Shop for an offer intelligently

Most people tend to look only at the promotional APRs on balance transfers before deciding where to transfer their balances. Doing so can be a mistake, as a 0% APR for 18 months isn't necessarily better than a 0% APR for 15 months when fees are taken into consideration.

The "standard" balance-transfer fee is 3% of the amount transferred, or $5, whichever is greater. Less common is a balance transfer fee of 5% or $10. These fees are added to the balance at the time of the transfer. Thus, if you transfer a $1,000 balance from one card to another card at a 3% fee, your balance on your old card will go down by $1,000, and you'll have a $1,030 balance ($1,000 transfer plus $30 of fees) on your new card.

Many of Fool.com's favorite balance-transfer cards offer the ability to transfer a balance for a 0% promo APR and avoid a balance transfer fee. We recommend avoiding balance-transfer fees when possible, since there is no shortage of fee-free balance-transfer cards on the market. 

Making the transfer

The actual process of making a balance transfer is rather simple. All you have to do is log in to your account where you want to transfer the balances and request a balance transfer online. This can also be done over the phone, or in a bank branch. You can even do it by mail in some cases.

Typically, the card company will need some basic information about the card from which you wish to transfer a balance:

1. The name of the card issuing bank.
2. The account number of the card.
3. The address to send a payment. For major issuers, this is typically filled in automatically, but you can find the address on a recent statement if necessary.
4. The amount you wish to transfer to your card.

What goes on behind the scenes is pretty simple. If you transfer a $5,000 balance, the new card company will simply send a payment of $5,000 to your old card company on your behalf. The $5,000 balance -- plus any fees, if applicable -- will then appear on the card you transferred your balances to.

Importantly, it can take seven to 10 days for the transfer to show up on the old card. Thus, it's important to make at least the minimum payment on the old credit card until the balance transfer is reflected on your statement to avoid any late payment fees or a ding to your credit score.

Balance-transfer best practices

There are a few things you can do to make the most of a balance-transfer offer.

1. Use the balance-transfer card for balance transfers only. After transferring a balance to a new card, it's not a bad idea to avoid using the card for as long as you have a balance from the transfer. If you aren't careful, using a balance-transfer card for purchases can result in a scenario where your monthly payments go toward paying off the balance transfer at a 0% APR while new purchases compound at an APR of 18% or more per year.
2. Make a plan to pay off your debt. The whole point of transferring a balance isn't to shuffle debt from one card to another until the end of time. Credit card balances are typically a symptom of a bigger budgeting problem. Reassess your budget and look for expenses you can cut to free up cash to pay down your balances.
3. Consider going back to debit or cash. Many people make the grave mistake of transferring a $3,000 balance from one card to a new card, only to run up a $3,000 balance on their old card again. Thus, a $3,000 credit card debt problem becomes a $6,000 credit card debt problem. Going back to cash or debit while paying down credit card debt is a good way to make sure you don't use freed-up credit limits to get in deeper trouble.

Playing the balance-transfer game

Balance transfers can be used to pay off credit card debt for good and save a fortune on interest expenses. To illustrate the potential savings, I created this table to show the interest savings on every $1,000 transferred from a card with a standard 18% APR to a 0% balance-transfer card.

Data source: author calculations for interest savings on a 0% APR balance transfer versus the same amount on a card with an 18% APR, assuming the balances are paid off completely at the balance-transfer period.

You can use this table as a guide for how much you can save by transferring your balances to a card with a 0% APR and no fee for the transfer. If you have $3,000 of balances to transfer, simply multiply every figure above by three. If you have $10,000 to transfer, multiply by 10. 

Realistically, if you have credit card debt, the value of a 0% balance-transfer offer is probably way higher than the benefits offered by even the best cash-back and travel cards. Balance-transfer cards are the only cards that offer the ability to earn or save hundreds or thousands of dollars to new cardholders.