Published in: Credit Cards | Sept. 26, 2018

A Complete Guide to Balance Transfers

If you have high interest credit card debt, a balance transfer could help you to reduce the costs of debt repayment. Balance transfers can also make paying back debt simpler. This guide will help you to decide if a balance transfer is the best way to reduce your interest rate and more easily repay money you owe.

Two credit cards on a table

Image: Getty Images

What is a balance transfer?

A balance transfer is a simple way to reduce interest on debt that can also help you to consolidate your total debt. The process involves moving an existing balance -- usually from a credit card -- onto a new card that offers a special low promotional interest rate.

Many balance transfer cards charge 0% interest for an introductory period, which means 100% of payments you make go towards paying down the principal rather than a portion of every payment going to interest.

If you have good enough credit to qualify for a balance transfer credit card offering a special promotional rate, the process of obtaining a balance transfer is quick and easy.

How do transfers work?

There's a few steps involved in the balance transfer process. You'll need to:

  • Research balance transfer offers. Ideally, you should find a card offering 0% interest on transferred balances for as long as possible. Some cards charge a balance transfer fee, but you can often find ones that don't.
  • Apply for a balance transfer card. If your credit score is above 670, you should have no trouble finding plenty of options -- although you'll have an even wider selection of card offers with a score of 740 or higher.
  • Transfer your balance. You'll be allowed to transfer debt either up to your credit card limit or up to a maximum limit set by the card issuer. You can transfer the balance online by submitting information about your existing account, including your account number and the amount you want to transfer. You can also call the credit card company to arrange your balance transfer.
  • Start paying on your new card. You should keep paying your existing debt until the balance transfer is complete. After the balance is transferred, begin making payments on your new account. Ideally, your monthly payment will be large enough that you can repay the entire transferred balance before the 0% introductory rate expires.

You may be able to use a balance transfer to pay other kinds of debt too. For example, some credit card companies provide special balance transfer checks you can use to deposit money into your bank account. You could use this money to pay off personal loans, auto loans, or other lenders you owe -- and would benefit from the 0% promotional rate.

However, it's common for credit card companies to restrict your ability to use a balance transfer to pay another card they issued. For example, you can't transfer the balance on one Chase card to a different Chase card.

Is there a limit on balance transfers?

Credit card providers limit the amount of money you can transfer onto a balance transfer credit card. These limits can vary based on the card issuer, but it's common to be restricted to transferring no more than $10,000 or $15,000 within a 30-day period.

You're not only limited by the maximum transfer limit set by card issuers for all borrowers, but also limited by your own individual credit line. When you apply for a new balance transfer credit card, your card issuer will specify how much credit it's willing to extend. For example, you may get approved for just a $5,000 credit limit if you already have a lot of outstanding debt.

Depending on the rules set by the card issuer, you may be able to borrow up to 100% of the credit line, or may be capped at a smaller percentage, such as 75%. If you were approved for a balance transfer card with a $5,000 limit but allowed to use only 75% of your available credit for transferred balances, you wouldn't be allowed to move more than $3,750 in existing debt to the new card.

Be sure to read the fine print to find out exactly how big of a balance you can move over to a new card. If you didn't get approved for a large enough credit limit to transfer the full balance you want, you can call the credit card company or use the company's online tools to request a credit line increase. However, there's no guarantee that you'll be approved to borrow more.

How long does a balance transfer take?

The process of transferring a balance can take a little time. First, you'll need to apply for the balance transfer card. Usually, but not always, you'll get approved or denied instantly after submitting your application -- but sometimes the card issuer will need more time to check out your credit history before deciding whether to lend to you.

As soon as your card is open, you'll be able to go online or contact the issuer to get the balance transfer process underway. However, it will take time for the debt balance to be moved over to the new card. The specific length of time can vary based on card issuer and the complexity of your situation, but it's common for the process of moving the transferred balances over to your new card to take around seven to 10 days.

Remember, there's no guarantee that your debt will necessarily be moved quickly. Keep making payments to the existing credit card issuer so you don't end up inadvertently missing a payment or paying late and hurting your credit score.

What is a balance transfer fee?

When you compare balance transfer offers, you may notice that some card issuers list a “balance transfer fee.” This is the fee you pay for having the balance moved over from your existing cards onto your new card. If you deposit balance transfer checks in the bank to gain access to cash, you'll still pay this balance transfer fee.

Typically, the balance transfer fee is equal to around 3% to 4% of the transferred balance. This would mean if you transferred $10,000, you'd pay a fee of around $300 to $400. However, some credit card issuers charge a higher fee for balance transfers while others charge no fee at all as part of special promotional offers.

Ideally, it makes sense to look for a balance transfer credit card that does not charge a fee. However, this shouldn't be the only factor you consider as there may be times when it's worth paying a fee to get better terms.

For example, if one card offers 0% APR on transferred balances for 6 months and charges no fees and another offers 0% APR for 18 months but charges a 3% fee, it sometimes makes sense to pay the fee to get a longer time to repay your debt. Assuming you could afford to pay $500 monthly and both of the cards had an 18% interest rate after the 0% promotional rate expires, the table below shows how you'd fare with these two cards.

Amount transferred Length of 0% APR Period Balance After 0% APR Expires Months at 18% Interest Interest Paid Balance Transfer Fee Interest + Fees
$5,000 6 months $2,000 5 $78 $0 $78
$5,000 18 months $0 0 $0 $150 $150
$10,000 6 months $7,000 16 $917 $0 $917
$10,000 18 months $1,000 3 $23 $300 $323

Source: Author calculations

With the smaller balance, the card with no fee is a better deal because even though you'll be paying interest for a few months, it's not enough to equal the balance transfer fee. But, if you'll have to pay for many months after the promotional offer expires, you'd be better off paying a small fee to transfer a balance to a card that gives you a longer time at 0% interest.

To find the best deal for you, figure out how much interest you'll pay by calculating the remaining balance at the end of the promotional period and multiplying that amount by the card's monthly interest rate. Add in any balance transfer fees and compare the total cost of debt repayment on both cards.

Of course, if you get a balance transfer with a short promotional period and no transfer fee, you could potentially transfer the balance again at the end of the promotional period when your APR goes up -- assuming you could find another credit issuer to approve you for a new balance transfer card. But, you may not be able to count on this as there's no guarantee you'll be approved for a new card. Locking in your 0% interest rate for a long time can make sense when you have a lot of debt to pay.

Compare balance transfer offers carefully

The bottom line if you're considering a balance transfer, is that you need to compare balance transfer offers carefully to find the best overall deal for your situation. You also need to ensure transferring the balance on your debt makes financial sense for you.

While this strategy can aid in debt payoff, it's not a solution to debt problems unless you stop getting deeper into credit card debt. If you transfer a balance to a 0% interest card but immediately max out your old card again, you'll be in worse shape. Transferring a balance makes the most sense as part of an overall plan to get out of debt and stay out for good.

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