What Is a Balance Transfer Credit Card? How It Works
Understand what a balance transfer credit card is, how the transfer process works, and the pros and cons of using one to pay off debt.
Key lesson
A balance transfer allows you to move debt from a high-interest credit card to a new card with a lower interest rate, often 0% for an introductory period. It is a powerful tool to pay off debt faster, but you must avoid adding new debt.
What is a balance transfer credit card?
If you are carrying a balance on a credit card with a high interest rate, a large portion of your monthly payment goes toward interest rather than paying down the actual debt. A balance transfer credit card offers a way to stop the bleeding.
A balance transfer involves moving debt from one or more accounts to a new credit card that offers a significantly lower interest rate. Many balance transfer cards offer a 0% introductory APR for a set period, typically ranging from 12 to 21 months.
How does a balance transfer work?
The process is straightforward. First, you apply for a new credit card that offers a balance transfer promotion. Once approved, you request a transfer from your old, high-interest card to the new one. The new credit card company pays off the balance on your old card, and that debt is moved to your new account at a much lower interest rate.
Watch out for balance transfer fees
While a 0% APR sounds like a free lunch, balance transfers usually come with a fee of 3% to 5% of the total amount transferred. For example, if you transfer $5,000 to a card with a 3% fee, you will be charged $150, which is added to your new balance. Even with the fee, a balance transfer usually saves significant money compared to paying 20% or more in interest on the old card.
The 0% APR introductory period
The most crucial detail of a balance transfer card is the length of the introductory 0% APR period. Once this period ends, any remaining balance will be subject to the card's standard interest rate, which can be quite high. To make the most of a balance transfer, divide the total balance by the number of months in the promotional period to find the monthly payment you need to make to become debt-free before interest kicks in.
Is a balance transfer right for you?
A balance transfer can be an excellent strategy if you have a solid plan to pay off the debt and the discipline not to rack up new charges on your old cards. However, if you use the transfer to free up credit on your old cards and start spending again, you will end up in twice as much debt as before. Remember, a balance transfer does not eliminate your debt — it just moves it to a new location to give you a temporary break from interest charges.