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CREDIT CARD

What Are Credit Card Balance Transfers?

EXPECTED READ TIME: 12 MINUTES

If you’ve ever seen a balance transfer advertisement, either from your current card company or one trying to gain your business, you might have wondered if it’s a good idea. Is that zero-interest offer too good to be true? Are there fees involved? How does it even work? And why would anyone need to transfer the balance on one card to another?

We’re here to walk you through all the details so you can decide if a credit card balance transfer is right for you.

What Is a Balance Transfer?

A credit card balance transfer allows you to move existing debt to your credit card. The goal is to move high-interest debt to a card with a lower interest rate/APR. This allows you to:

  • Consolidate debt into one monthly payment
  • Pay more toward the principle
  • Save on the total cost of your debt

Although balance transfers are usually used for paying off credit card debt, sometimes you can also move other types of debt like personal loans, auto loans, or home equity lines of credit (HELOCs). The types of debt you can transfer depend on your individual lender. 

Read up on proven strategies for paying off credit card debt — for good.

Balance transfer credit cards offer special incentives to customers such as a low or 0% introductory APR for a year or more. Customers who pay down their balance during this introductory period can save a lot in interest charges. 

How to Do a Balance Transfer

Completing a credit card balance transfer is pretty simple and can be done over the phone or online. While every lender has their own process, the steps are usually similar:

  1. Check your credit score. Your score will determine the kinds of offers you’ll receive and which cards you’ll be approved for. Look over your credit report and fix any errors. If your score isn’t high enough to land the offer you want, consider improving your credit score before applying. (Lenders usually reserve the best offers for borrowers with a FICO score of 690 or higher.)
  2. Research balance transfer credit card options. Crunch the numbers with different offers and make sure you’ll save money with a balance transfer. You can even use a free online balance transfer calculator to compare savings and costs with different card offers.
  3. Apply for a card. The process of applying for a balance transfer credit card is the same as applying for any other card, and you can take steps to increase your chances of qualifying. Some lenders will let you request a balance transfer as part of the application process, while others will require you to request a transfer after you’ve been approved.
  4. Request your balance transfer. You’ll need information about each account you’re transferring debt from including your account number, the amount of debt you’re moving, and the issuer name. Stop using the credit card you’ve transferred your balance from but continue making payments on it until your balance transfer is complete.
  5. Begin paying on your new card. It could take anywhere from a few days to a few weeks before your balance transfer is complete. Once that happens, you’ll see your total debt plus transfer fees appear on your new credit card.
Although balance transfers are usually used for paying off credit card debt, sometimes you can also move other types of debt.

What Is a Balance Transfer Fee?

Balance transfers aren’t free. Most lenders charge a one-time balance transfer fee of either 2-3% of the total amount you transfer or a fixed dollar amount that’s different from creditor to creditor. What does that amount to? Well, if you wanted to move your $5,000 balance to a new card and were charged a 3% balance transfer fee, you’d make a one-time payment of $150 to move your debt. 

How Long Does a Balance Transfer Take?

Most balance transfers are completed between five and seven days, although they can take up to 21 days.

Don’t stop paying your credit card just because you’ve requested a balance transfer. Until that debt moves to your new card, you’re still responsible for any regular payments.

Most balance transfers are completed between five and seven days, although they can take up to 21 days.

Do Balance Transfers Hurt Your Credit?

A balance transfer can lower your credit score temporarily, especially if you move your existing balances to a new card. As part of the approval process for your new credit card, you’ll undergo a hard credit inquiry. You’ll also be opening a new line of credit, lowering the average age of your accounts. These factors can both lower your credit score.

If you have a longer credit history, these effects might not lower your score too much. Plus, if you transfer your balance and start making progress on paying it off, your credit could improve substantially in a few months anyway.

Learn how a credit card can help you build credit.

Transfer Your Balance to an Existing Credit Card

Another option is to transfer all your balances to a low-APR card you already have. This way, you avoid a hard credit inquiry, and the average age of your accounts stays the same.

Transferring your balance to an existing card will increase the credit utilization ratio on that credit card, which is another factor that can lower your credit score. You may also miss out on great offers from new cards like low or 0% APR on your transfer for six or more months. 

When interest is waived, you can pay directly on the amount you borrowed, paying off your debt faster and saving money.

Pros and Cons of a Balance Transfer

Balance transfers can be a great option sometimes, but they’re not right for everyone or for every situation. Here are a few things you should know before requesting a balance transfer.

Pros of Balance Transfers Cons of Balance Transfers
Save money on interest Balance transfer fee
Pay on the principle of your debt Transfer limits
May raise your credit score in the long run May temporarily lower your credit score

Pro: Save Money on Interest

The biggest advantage to a credit card balance transfer is it that it can save money on interest. For instance, say you have a balance of $3,000 on a credit card with an interest rate of 17%. If you pay it off in 12 months, you’ll pay $236 in interest charges.

But with an introductory rate of 0% APR for one year, that $236 stays in your pocket. And since your whole monthly payment goes to the principle of your debt, you could be debt-free in less than 12 months if you keep paying the same amount per month.

Balance transfer credit cards come with spending limits just like any other credit card.

 

Pro: Pay on the Principle of Your Debt

Interest charges can make it harder to pay off any debt, let alone a credit card balance. When interest is waived, you can pay directly on the amount you borrowed, paying off your debt faster and saving money. 

Pro: Could Raise Your Credit Score in the Long Run

One factor in your credit score is your debt utilization ratio, or how much available debt you’re using. A credit card balance transfer can help you reduce your total debt, improving your credit utilization rate and establishing a healthy payment history — and raising your credit score.

What does your credit report say about you?

Con: Balance Transfer Fees

A balance transfer fee does add to your debt. The fee could be fixed, but it is usually based on a percentage of the balance you’re moving, so the larger your balance is, the bigger your transfer fee will be.

Con: Transfer Limits

Balance transfer credit cards come with spending limits just like any other credit card. Your limit is based on factors like your credit score, credit history, and the amount of other debt you have. If the balance you want to transfer is larger than your transfer limit, you may only be able to transfer part of the debt to your new card. (Most experts suggest starting with your highest-interest debt first.)

Any time you open a new line of credit you risk lowering your credit score.

Con: May Temporarily Lower Your Credit

You can save a lot by opening a new credit card to take advantage of special balance transfer options. However, any time you open a new line of credit you risk lowering your credit score. This drop may be small if you have lots of established credit, but if you have little or poor credit it might make it hard to open any additional lines of credit for a while.

Balance Transfer or Personal Loan: Which Is Better?

One alternative to a credit card balance transfer is a personal loan. Personal loans are often used to consolidate and pay off debt, and in many cases they offer better terms than credit cards. Here are a few factors you should consider when deciding between a balance transfer and a personal loan:

Personal Loans Credit Card Balance Transfers
Installment debt gets paid in full Revolving debt can add up over time
Fixed interest rate Variable interest rate
Often have lower interest rates than credit cards May offer low or 0% introductory APR
Small, predictable monthly payments Making payments to catch up
Application and initiation fees Balance transfer fees
Must qualify Must qualify

Installment vs. Revolving Debt

Installment debt is money you borrow and pay back in a specified number of equal payments. Examples of installment debt include:

  • Auto loans
  • Student loans
  • Mortgages

Revolving debt is money you borrow, repay, and borrow from again. Credit cards and personal lines of credit are examples of revolving debt. You can continue paying on this kind of debt for years and years without paying it off, especially if you continue spending.

Credit cards and personal lines of credit are examples of revolving debt.

Personal loans are a form of installment debt. You borrow the full amount in a lump sum and repay it in a specific number of payments. And because you can’t borrow more, you can’t go deeper in debt.

Fixed vs. Variable Interest Rates

Personal loans usually have fixed interest rates. No matter what the economy does, you’ll pay the same interest until your loan term is complete.

Credit cards come with variable interest rates. This means you might open a card with a great rate, but, depending on economic factors, that interest rate could increase. If you transfer a balance to a credit card with an amazing introductory APR but don’t fully repay your debt during the introductory period, then you could end up spending a lot more than you expected. 

What's the difference between a fixed rate and a variable rate?

Low vs. High Interest Rates

Personal loans usually carry lower interest rates than credit cards, although the rate you receive is partially based on your credit history. Of course, you’ll start paying interest on your very first payment with a personal loan, whereas many credit cards offer competitive introductory APRs that can save you hundreds of dollars.

Predictable Payments vs. Catch-Up Payments

Because personal loans are installment loans, you’ll know from the beginning how much you’ll pay every month. Many borrowers like that they can budget for that expense more easily than they can with credit cards. Since the interest you pay on a credit card depends on the average daily balance during your billing cycle, your interest charges could vary from month to month once the interest kicks in.

On top of that, the amount you need to pay off will shift with how much you spend. Yes, most cards come with fixed minimum payments, but the minimum payment is often so low it doesn’t really make a dent (especially considering interest), so we don’t recommend using it as a comparison tool.  

While credit cards charge a transfer fee when you move your debt, personal loans charge application and initiation fees.

Additional Fees

While credit cards charge a transfer fee when you move your debt, personal loans charge application and initiation fees. These fees are typically small and can be rolled into your loan so you don’t have to pay them up front, just like with transfer fees.

Qualifying

You’ll have to qualify for a personal loan just like you have to qualify for a credit card. A lender will do a hard credit inquiry, which will impact your credit score (same deal for a credit card). Although qualifying for a personal loan isn’t hard compared to many types of other loans, it is sometimes more difficult to get approval for a personal loan than for a credit card. 

There’s no magic balance transfer credit card that’s right for every person.

What Is the Best Balance Transfer Credit Card?

There’s no magic balance transfer credit card that’s right for every person. Finding your perfect fit will take a little research, but here are the essential features you should look for:

  • 0% introductory fee for balance transfers (not just for new purchases)
  • 0% annual fee
  • 0% balance transfer fee (or convenient ways to waive this fee)
  • Reasonable penalties for late or partial payments — some lenders may apply penalty rates as high as 29.99% for violating your cardholder agreement

In addition to these key features, look for a long introductory period on your card so you can maximize the benefits of low to no APR. Although these periods can last as little as six months, it’s not uncommon to find introductory periods of 12, 18, or 24 months (depending on your credit). 

Look for a long introductory period on your card so you can maximize the benefits of low to no APR.

It’s less common to find cards that offer rewards points for balance transfers. If you do it can be a nice way to earn cashback or travel rewards, but prioritize a low APR and long introductory period over rewards if you want the most savings.

What to Consider Before a Balance Transfer

If you think a balance transfer is right for you, here are a few important tips to help you make the most of it:

  • Balance transfers usually require a fee of around 3-5% of the total amount transferred.
  • Transfer your balance to a card with a spending limit that’s high enough to accommodate your full balance.
  • If you select a card with a 0% introductory rate, make sure to check what the rate will be after the promotional period.
  • With some credit cards, your transferred balance may not be eligible for rewards.
  • A balance transfer is just one part of your strategy to save on monthly expenses. Learning other financial skills like creating a personal budget and strategies for paying off credit card debt will have a higher payoff in the long run.

Once you open your new balance transfer credit card, keep your old card’s account open. Closing accounts can hurt your credit score whereas keeping them open will raise the average age of all your credit accounts.

Need help with a PenFed balance transfer?

The Takeaway

Remember, a balance transfer is just one part of a savvy plan to take control of your finances. Review your budget, check your spending, and prioritize paying down your balance. Use your introductory APR to make on-time monthly payments and you’ll be amazed by how much you’ll save. 

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