Balance transfer credit cards: What they are and how they work
Quick insights
- Balance transfer credit cards enable cardmembers to move existing debt from one card to another, potentially with a lower interest rate.
- Balance transfer credit cards may help you save on interest costs, but you may need to make your payments strategically.
- The cost of balance transfer fees and the length of the promotional period are factors to consider to help you determine if a balance transfer credit card is beneficial for you.
Are you looking to lower your interest rate on your credit card balance? A balance transfer credit card is a type of credit card that enables cardmembers to transfer existing debt from one or more credit cards to a new card, typically with a lower interest rate for a specified period. This may reduce the amount of interest you owe and help you pay off your debt sooner. Let’s go into more details about balance transfer credit cards below.
How balance transfer credit cards work
For customers interested in a balance transfer credit card, the first step is to apply for the card, typically one that comes with a lower (sometimes promotional) interest rate for a specific duration. Then, if you’ve been approved, the next step is to transfer the balance from your existing card(s) to the new card. This is usually done by providing your issuer with details of the debts you want to transfer. It is recommended to review the card’s terms and conditions before signing off on agreements—factors to consider include how long the promotional period lasts, balance transfer fees and applicable interest rates.
Note that you may have to pay a balance transfer fee. Most balance transfer credit cards charge a fee for transferring the balance, typically around 2% to 5% of the amount transferred. For example, if you transferred $5,000 worth of debt to a another card with a 3% balance transfer fee, the balance transfer fee could be $150. The timeframe for transfers may vary by lender. Some issuers, though not as common, may offer balance transfers with no fee.
If a promotional interest rate applies, the remaining balance will be subject to your card’s regular interest rate (usually much higher than the promotional or introductory rate). This is why it can be helpful to pay off as much of your balance as possible before this period ends. By doing so, you may be able to minimize the amount of money subject to higher interest rates later, and potentially save money.
When it makes sense to do a balance transfer
A few examples why you may want to initiate a balance transfer include:
- To pay off high-interest debt at a lower interest rate
- To pay debt off faster
- To simplify finances and use new benefits
- To lower your original card’s credit utilization ratio
Factors to consider before applying for a balance transfer credit card
Before opening a balance transfer credit card, it can be helpful to consider several factors to ensure it aligns with your financial goals and circumstances:
- Balance transfer fees: Do the savings from the lower interest rate outweigh the cost of the balance transfer fee?
- Promotional interest rate and period: Does the card offer a low or no introductory annual percentage rate (APR) and how is the promotional period? Find out when the promotional period ends and what will the regular APR will be afterward?
- Credit limit: Is the credit limit on the new card sufficient to cover the balance you wish to transfer? Having a high credit utilization ratio on the new card may impact your credit score.
- Impact on credit score: Opening a new credit card may temporarily affect your credit score due to the hard credit check. Additionally, your score could be impacted if there are significant changes in your credit utilization ratio.
- Payment plan: Having a plan to pay off the entire balance within the promotional period may help you avoid high interest charges once the regular APR kicks in.
Do balance transfers hurt your credit score?
While a balance transfer itself may not affect your score, the actions that happen before or after the balance transfer might. A balance transfer may negatively impact a credit score in the following ways:
- Hard credit check: When you apply for a new balance transfer credit card, the issuer will perform a hard credit check on your credit report. This may temporarily lower your credit score by a few points.
- New credit account: Opening a new credit card can affect the average age of your credit accounts, which is a factor in your credit score. A lower average age may negatively impact your score.
- Credit utilization: If you transfer a large balance to a card with a lower credit limit, your credit utilization ratio might increase, which may negatively affect your score. It's typically recommended to keep your utilization below 30% of your total available credit.
There are also potential positives of balance transfers, such as saving on interest in the long run and helping you to better manage your debt.
When should you not do a balance transfer?
There may be a few situations where a balance transfer may not be beneficial. For example, high balance transfer fees may outweigh the potential savings in interest costs. Your new card may come with a low credit limit, which won’t cover the total debt you wish to transfer. Additionally, if the promotional period is too short for you to pay off your debt in a reasonable, timely manner, you may want to forego a balance transfer.
Finally, if your current credit score is low, you may not qualify for a balance transfer credit card, so you may want to work on improving your score first to potentially land better terms.
What happens to an old credit card after a balance transfer?
Your original credit card account will remain open unless you choose to close it. Closing the card may negatively impact your credit score, as it relates to your credit history and credit age. Any amount that is not transferred will remain on the original card.
Conclusion
Balance transfer credit cards offer a way of saving on interest when paying off current debts. However, depending on your financial situation and goals, balance transfer credit cards may not work for you. Reviewing the terms and conditions of your card, considering the costs of a balance transfer credit card and reviewing your existing debts may help you to come up with a debt consolidation plan that works for you.
