A Complete Guide to Balance Transfers

Lyle is a writer specializing in credit cards, travel rewards programs, and banking. His work has also appeared on MSN Money, USA Today, and Yahoo! Finance.

If you're looking for ways to pay off your credit card debt, a popular option you've probably heard about is a balance transfer. This gives you the opportunity to both simplify your debt repayment and save a lot of money in interest.

A balance transfer is a big step, and you don't want to jump into it before you fully understand how it works. In this detailed guide, you'll find everything you need to know, including how to do a balance transfer and how it compares to a couple of alternatives.

What is a balance transfer?

A balance transfer is when you move an existing debt onto a credit card. In most cases, this involves transferring credit card debt from one card to another. However, some card issuers also offer balance transfer checks that you can use to pay other types of debt.

You would typically move the balance to a card that offers a special low promotional interest rate on balance transfers. The best balance transfer cards offer 0% interest for an introductory period. That means for the intro period, 100% of your payments go towards paying down your principal, and you won't incur any interest charges.

Since you can transfer multiple balances to the same card, balance transfers are a good way to consolidate your credit card debt.

How do balance transfers work?

Here's how to do a balance transfer:

  • Research balance transfer cards: Ideally, you want a card with a 0% intro APR that lasts long enough to pay your credit card debt in full.
  • Apply for a card: Once you've found a card, it's time to fill out an application. Some card issuers will ask if you plan to transfer any balances when you apply. If so, you can set up your balance transfer at this time.
  • Transfer the balance: You can transfer a balance through the online account for your new card. You'll need to provide information on the credit card with the balance you're transferring, including the credit card number and the amount you want to transfer. Another option is to call the number on the back of your new card and set up your transfer by phone.
  • Start making payments: You need to continue making payments on your old card until the transfer process is complete. After the balance is transferred, you'll make payments on the new card.

Keep in mind that you typically can't transfer balances between two cards from the same credit card company. You could transfer a balance from a Chase card to a Citi card, but you couldn't transfer a balance from a Chase card to another Chase card.

What to look for in a balance transfer card

Here are the features you should look at when choosing a balance transfer credit card:

  • Intro APR: A 0% intro APR is standard, so you shouldn't choose a card with a higher rate.
  • Length of intro APR: Longer is generally better because you'll have more time to pay off your credit card debt.
  • Balance transfer fee: Most cards charge a balance transfer fee of 3% to 5% of the transaction amount, but you can often find cards without this fee.
  • Balance transfer limit: The balance transfer plus any applicable balance transfer fee can't exceed the card's credit limit. Some cards also add specific balance transfer limits. These can either be fixed amounts, such as $10,000, or a percentage of whatever credit limit you're given.

Although most consumers want to get the longest 0% APR intro period possible, you should also check balance transfer fees to determine which card will save you the most money. Let's say you have $5,000 in credit card debt, and you can pay $400 per month towards that. You're comparing two balance transfer cards with the following features:

  • 18-month 0% intro APR on balance transfers, 3% balance transfer fee
  • 15-month 0% intro APR on balance transfers, no balance transfer fee

The first card has the longer intro APR, but if you're sure you can pay $400 per month, then you'll pay off your debt in less than 15 months either way. The second card would save you $150 because it doesn't charge a balance transfer fee.

How to pay off debt using a balance transfer

A balance transfer is a tool you can use to consolidate your debt, pay it off more quickly, and stop paying interest for a year or longer.

The easiest way to understand how a balance transfer can help you pay off debt is by looking at an example. Let's say you're carrying balances across three credit cards. We'll use a total amount of $5,700 since that's close to the average credit card debt at the end of 2018. If you could pay $300 per month towards that debt, here's the difference between using and not using a balance transfer:

APR Monthly Payment Time to Pay Off Interest Paid
0% for 12 months, then 17% $300 20 months $127
17% $300 23 months $987

Thanks to that balance transfer, you save $860. You've paid off your debt three months earlier, and because you consolidated your debt, you only needed to make one monthly payment instead of three. The table above does assume you use a card without a balance transfer fee. Even if the card you choose charges a small fee, you'll still save quite a bit of money.

Balance transfer vs. personal loan

A personal loan is a common alternative to a balance transfer. If you get a personal loan, you can use that to pay off your debt, and then make payments on the loan.

The biggest disadvantage of a personal loan is the interest rate. Although you can likely find a personal loan with a lower interest rate than your credit card debt, you won't get a 0% intro APR.

On the other hand, you can typically get a personal loan with a term of three to five years. That's much longer than the 0% APR intro period on any balance transfer card. Personal loans can also be used to pay almost any type of debt. Unless you have balance transfer checks, a balance transfer card can only be used for credit card debt.

In most cases, it's smarter to start with a balance transfer card and pay down as much debt as you can during the intro period. If you still have debt afterwards, you can apply for a personal loan. This method gets you the best of both worlds. You take advantage of that 0% intro APR, and then you'll have a much smaller amount left to pay off with a personal loan.

Balance transfer vs. 401(k) loan

If you have a 401(k), you may also be considering a 401(k) loan to pay off your credit card debt. This type of loan allows you to use money from your 401(k) and avoid early withdrawal penalties. You repay this type of loan through automatic deductions from your paycheck, and you can typically get a term of up to five years.

Although that might sound convenient, you should only tap into retirement savings as a last resort. A balance transfer is the much better choice for several reasons:

  • By borrowing money from your retirement fund, you could miss out on growth, especially if the market is going up.
  • If you lose your job, your 401(k) plan will likely require that you pay back the entire loan quickly. Otherwise, the loan will be considered an early retirement plan distribution, resulting in taxes and penalties.
  • It's also considered an early retirement plan distribution if you don't pay the loan off by the end of the term, and the longest term in most cases is five years. Again, you'd pay taxes and penalties.
  • In a worst-case scenario where you eventually need to declare bankruptcy, credit card debt is dischargeable, but a 401(k) loan isn't.

The only situation when a 401(k) loan would be the right choice is if you don't have the credit to get a balance transfer card, because your credit score won't matter for a 401(k) loan.

Should I do a balance transfer?

If you have credit card debt and a good credit score, you should use a balance transfer to save money on interest.

Some financial decisions are difficult, but this isn't one of them. Credit card interest rates make debt much harder to repay. A balance transfer gives you an interest-free opportunity to pay back what you owe.

You should review your credit score first to make sure you'll qualify for a balance transfer. If you haven't done this before, there are quite a few free ways to get your credit score online. A FICO® Score of at least 670 is recommended to qualify for a balance transfer card.

What should I do with my old card after a balance transfer?

After a balance transfer, the best approach is to stop using your old credit card. You may even want to keep it locked away at home so that you're not tempted to use it. If you keep using the old card, you could fall into the same bad spending habits as before and end up with even more credit card debt.

You may be wondering if you should just cancel the old card, given that you won't be using it. This can cause your credit score to drop, because your credit utilization will increase when you cancel the card and lose a portion of your available credit. Unless the card has an annual fee or you're worried you'll continue using it, you're likely better off keeping it open.

Making the most of a balance transfer

If you've decided to go through with a balance transfer, remember that it only works when you fully commit to paying off what you owe. It's also crucial that you always pay on time, because the 0% intro APR could be canceled after a missed payment.

It's easy to relax and spend more than you should once your credit card debt isn't racking up interest anymore. But that just leaves you with the same problems that you had in the first place -- or even bigger ones as you'll have even more high-interest debt to deal with.

That intro APR won't last forever, so make sure you pay back as much debt as you can before it ends.

FAQs

  • A balance transfer is a feature some credit cards offer that allows you to move existing debt from another account onto the credit card. Since many balance transfer cards offer 0% intro APRs, this feature can save you money as you repay your debt.

    Most credit card companies only offer balance transfers from one credit card to another, but a few also offer balance transfer checks you can use to pay almost any type of debt.

  • After you get a balance transfer credit card, you can set up a balance transfer either through your online account or by calling the card issuer. You'll need to provide the credit card number of the card with the balance you're transferring, as well as the transfer amount.

  • You should do a balance transfer if you can qualify for a balance transfer credit card, because it's a great way to stop paying expensive interest charges on your debt. Most of these cards require good credit, so you should have a credit score of 670 or higher for a strong chance of approval.

  • Don't use your old credit card after a balance transfer, at least until you've finished paying off your credit card debt. If you keep using your old credit card, then you'll have another balance to repay, which will only make repaying your debts more complicated.

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