What is a Balance Transfer?

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A balance transfer is the transfer of a balance of debt from one account to another, often to transfer balances between credit cards.

🤔 Understanding balance transfer

Balance transfers offer credit cardholders the opportunity to move a balance of debt from one card to another — Often to a card with a lower interest rate. Many credit card companies will offer special, low introductory rates for several months before they start charging interest. These initial offers often include minimal interest rates or even no interest at all. These offers can be beneficial to those with credit card debt if they can pay off the balance before the low or no-interest period ends. An alternative to a balance transfer card could be a personal loan, where someone carrying credit card debt takes out a personal loan to consolidate their loan at a lower interest rate.


Transferring your credit card balance is like refinancing your mortgage…

When you refinance your mortgage, you’re often trying to either lower your interest rate or lower your monthly payment (or both). In the case of a balance transfer card, the cardholder is looking to reduce their payment and interest rate so they can get control of their debt.

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How do balance transfers work?

When you do a credit card balance transfer, you’re moving your outstanding balance of credit card debt from one card to another. Often cardholders will move a balance to a credit card at a lower rate. Many cards have introductory rates of 0% for a particular number of months for those who transfer their balance to that card.

A balance transfer might be the right choice for you if you have a large credit card balance that is racking up a lot of interest; though, it’s important to pay close attention to the terms of the new card and avoid running up even more debt. Moving to a low or no-interest card can help stop your transferred balance from growing so you can catch up if you are careful and immediately begin paying down your debt.

Step 1: Find the Right Card

The first step to initiating a balance transfer is to find a card to transfer your balance to. If you do an internet search for balance transfer cards, you’ll find that plenty of credit card companies offer promotional deals to entice you to transfer your balance to their card. Read the terms of each offer.

In general, a longer interest-free period is advantageous. But also pay close attention to the interest rate after the introductory period. It might not be as good of a deal as it sounds if you get zero percent interest for the first six months, but then an interest rate higher than the one you were already paying after that.

You also might be able to transfer the balance to an existing card and still take advantage of an introductory interest rate. Often credit card companies will offer a special deal on your first balance transfer, even if you’ve had the card for a while. Remember, it’s good for the credit card issuer to get your business even with an interest-free period.

They still profit off the deal, since they’ll probably charge you a fee. Plus, they’re banking on the fact that you won’t pay off your entire balance during the interest-free period, and you’ll still end up paying them interest later.

Step 2: Transfer the Balance

Once you’ve chosen the right balance transfer card for you, it’s time to make it official. The exact process may vary slightly from one credit card company to the next. In general, you’ll have to fill out a standard credit card application. Once they accept your application, you’ll provide the account number for your other credit card and the amount you want to transfer over.

Then, your new credit card company will pay off the balance on the original credit card. That balance then appears on your new account.

The credit card you’re using will determine how long the balance transfer takes to go through. The process can take anywhere from just a few days to six weeks. Your new credit card company should be able to give some guidance on how long it will take.

In the period between being approved for the balance transfer and the transfer occurring, make sure to continue to pay your monthly bill on the original credit card account. The last thing you want is to assume you’re done with that account and then have a late payment that dings your credit score and incurs other fees.

Step 3: Pay Off the Balance as Quickly as Possible

Once you’ve transferred the balance to the new card, you’ll be responsible for paying your monthly payment on that card by the due date. At the very least, you’ll have to pay the minimum amount.

But remember, the selling point of balance transfer cards is that interest-free period. It’s in your best interest to pay off the entire balance (or as much of it as you can) during that time. The last thing you want is to be stuck with almost as large of a balance after that introductory period and then get stuck with a high interest rate — potentially one even higher than you had before.

Do balance transfers affect your credit score?

Whether or not your balance transfer affects your credit score depends on your circumstances. The short answer is that it often does affect your credit score, but it doesn’t always.

Certain parts of the balance transfer process could affect your score. For example, a hard inquiry on your credit report could have a small impact on your credit score. So if you’re applying for a new credit card for your balance transfer, your score might drop a bit.

On the other hand, taking out a new credit card will probably mean you’re increasing the amount of credit you have available to you, which lowers your credit utilization rate (the percentage of your available credit that you’re using). Your credit utilization rate is one of the factors that determine your credit score, so lowering your utilization rate could increase your credit score.

Finally, the average age of the accounts on your credit report is a determining factor for your credit score. The older the average age of your credit accounts, the better it is for your credit score. If you take out a new credit card, you’ll likely decrease that average, which could lower your score.

As you can see, there’s some good news and some bad news. Unfortunately, that means it’s impossible to predict what the ultimate impact would be for any given person.

And, remember, these factors are all specific to people taking out a new credit for their balance transfer. If you’re transferring your balance to a credit card you already have, your credit limit and average account age would presumably remain the same, and you wouldn’t have a hard inquiry on your credit. In that case, the process could have no impact on your credit at all.

Is it better to do a balance transfer or a personal loan?

A balance transfer can be a great way to slow down the growing interest on your credit card debt, but it’s not the only option. Another way some people choose to tackle their credit card situation, especially if they have debt on multiple cards, is to consolidate the debt into a personal loan.

A personal loan is a loan that you take from a bank, credit union, or other lending institution. Personal loans are usually unsecured, meaning they don’t require any sort of collateral (aka a personal asset the lender would seize if you default on your loan). Personal loans usually have a lower interest rate than credit cards, but a higher interest rate than a secured loan (such as a car loan or a mortgage).

So is it better to do a balance transfer or take out a personal loan? That depends primarily on your monthly cash flow, the amount of debt you have, and how long you expect to be paying on the debt.

One of the big selling points of balance transfer cards is the introductory interest rate, often of zero percent. If you think you can pay off your entire balance during that intro period, then a balance transfer card can save you a lot of money. The downside is that if you fail to pay it off in that time, you’ll probably have a pretty hefty interest rate.

Personal loans don’t typically offer any kind of interest-free period, but they do have a lower interest rate than credit cards. So if you have a large amount of debt and know you won’t be able to pay it off within a year (or whatever your introductory period is), then a personal loan might save you more money in the long run.

On the flip side, the minimum payment on a personal loan will probably be higher than the minimum payment on a credit card. This higher payment could be a good thing because it forces you to pay off your debt faster. But it’s also possible that for someone on a limited income, the monthly payment might be more than you can afford. In that case, a balance transfer credit card might be a better option. Then if you’re able to increase your income, you could try for the personal loan after your introductory rate has ended.

Is a balance transfer a good idea?

Whether or not to do a balance transfer depends on your situation. There are advantages and disadvantages to consider. Balance transfers can help to slow your growing balance and can save you a lot of money on interest. If you can pay the card off during the introductory rate period, you might avoid paying any further interest altogether.

On the other hand, balance transfers could put you in a worse situation in the long run. First, they typically require a balance transfer fee. Often this just gets tacked onto your credit card balance. It’s also important to know that the introductory rate doesn’t last forever. Eventually, the promotional period will end, and you’ll probably be paying a significant interest rate.

Transferring your balance might also include applying for a new credit card. For people who are struggling financially and don’t have good credit, you might have a hard time getting another credit card.

Ultimately you have to know your situation. If you have a moderate amount of credit card debt that you think you can fully pay off (or almost fully pay off) in the promotional period, then a balance transfer might be an excellent option for you. If you have a significant amount of credit card debt and know you’ll be paying on it for years to come, it’s probably better to look for alternative options such as a personal loan.

Finally, be sure to examine the root cause of the problem. If your credit card debt came about because of an unavoidable emergency and you haven’t added to it, then proceed with paying it off in whatever way works best for you.

But if you’re continuing to rack up even more credit card debt, saving a little money on interest in the short-term isn’t going to help address the big-picture problem. Adding another credit card to your wallet might even make the problem worse since you’ll have more credit available to you.

How do I choose the best balance transfer card?

When it comes to choosing the right balance transfer card for you, there are a few things to consider. First things first, check to see if any of your existing credit cards will give you an introductory rate on a new balance transfer. That can often be the best option because it doesn’t require an inquiry on your credit report and might avoid a situation where a company denies your application.

If that’s not an option, look at the terms each credit card company is offering. Things to specifically consider would be:

  • The introductory rate: The lower, the better — Try to find one with a 0% balance transfer offer.
  • The introductory period: They often vary from as short as six months to as long as 18 months — The longer, the better.
  • The interest rate after the introductory period: If the rate is astronomical (which it often is), see if you can find a better rate elsewhere.
  • The balance transfer fee: Many cards have a fee of a few percentage points of your balance.
  • The company’s credit requirements: Many credit card companies require good to excellent credit on their balance transfer cards.

Luckily, there are plenty of credit card companies that have promotional card offers on balance transfers. Here are a few popular balance transfer credit card offers as of January 2020:

  • Discover it Balance Transfer Card: 0% interest rate for the first 18 months
  • Citi Diamond Preferred Card: 0% interest rate for the first 21 months
  • BankAmericard Credit Card: 0% interest for the first 18 billing cycles
  • Chase Freedom Unlimited: 0% interest for the first 15 months
  • Capital One Quicksilver Rewards Credit Card: 0% interest for the first 15 months
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