A balance transfer on a credit card occurs when you move the entire balance from one credit card to another. You are essentially using a credit card to pay off another credit card. Balancer transfers are often used to consolidate debt or switch to a card with a lower annual percentage rate (APR). Here is everything you should know about balance transfers.
What’s a balance transfer?
Moving the entire outstanding debt from one credit card to another card is a balance transfer. It is a common debt consolidation strategy and may save money. When you find an offer with a lower APR compared to your current credit card, you spend less on interest as you pay down the debt.
Keep in mind that balance transfers do not reduce the amount of money that you owe. You may technically end up with slightly more debt if you need to pay a balance transfer fee.
Most credit card companies charge a 3% to 5% fee when completing a standard transfer from one card to another. For example, you have two credit cards and decide to initiate a transfer of $2,000. You would typically be charged $60 to $100 for the transaction.
To entice new customers to roll over their entire balances, many credit card companies offer “balance transfer cards.” A balance transfer card is a type of promotion that often includes no additional transfer fees. They may also offer an introductory period with no interest charged.
How do you do a balance transfer?
The process for completing a balance transfer may vary depending on the credit card issuer. However, the following steps are common when working with one of the major credit card companies:
1. Apply for a credit card
The first step is to apply for a new balance transfer credit card. As the goal is often to save money, you should look for new card offers with a lower rate of interest. If your application is approved, you can initiate the balance transfer.
While balance transfers are typically completed by opening a new card, transfers can also be completed with an existing card. For example, if you have more than one credit card, you may choose to transfer the balance to the card with the lowest APR.
2. Initiate your balance transfer
The credit card company that issues the new card may supply you with a balance-transfer check or complete an electronic transfer.
If the credit card company issues a balance-transfer check, it is the cardholder’s responsibility to write the check out to the existing card company that they want to pay off. With electronic transfers, the new card company requests the account information for the existing account and arranges the transfer.
3. Start making monthly payments
After completing the transfer, the new credit card holds the balance of the debt. You then make monthly payments on the new card and may cancel the old card.
What should you look for when transferring balances?
If you are opening a new card for the balance transfer, the credit limit on the new card needs to exceed your existing balance. You also need to pay attention to your credit limit when transferring debt to an existing card. For example, if you have a $5,000 credit limit and a $3,000 balance on a card with a low APR, you can only transfer up to $2,000 to that card.
Along with the amount of debt and available credit limits, you need to consider the following details before completing a balance transfer:
- Balance transfer fees
- Annual percentage rate (APR)
- Annual fees and extra charges
If you get charged high balance transfer fees, interest, and annual fees, you may not save as much as you hoped to after completing the transfer. Keep in mind that your ability to find 0% APR, no annual fees, and no transfer fees depend heavily on your credit.
After applying for a new card, the issuer reviews your credit score and history. If you have bad credit, the credit card company may amend the offer with higher fees to offset the risk of approving the card.
Find offers with no balance transfer fees
The average balance transfer fee is 3% to 5%. Balance transfer fees add more debt instead of helping you cut it down. The transfer fee is added to your balance. For example, you transfer a $5,000 balance to a new credit card with an issuer that charges a 3% fee. The fee for the transfer is $150, resulting in a total balance of $5,150.
WalletHub’s Credit Card Landscape Report found that the average interest rate for credit cards is 17.87%. With a 17.87% APR on a $5,000 balance, you would get charged close to $150 in interest during the first year. To make the transfer worth the effort, you would need a transfer fee of less than 3%.
Many balance-transfer offers include no transfer fees for those who qualify. However, the details of the offer vary from one credit card company to the next. Always read the fine print to avoid getting charged transfer fees.
For example, some companies only waive the transfer fees if you complete the transfer within a set timeframe after opening your new account. If you overlook certain details, you may end up paying the transfer fees.
Look for low or zero APR introductory periods
Along with zero transfer fees, look for credit card offers with low or zero APR introductory periods. Many credit card companies offer 0% APR for the first 12 to 24 months after opening your new card. Offers also change based on the state of the economy. When the federal interest rate increases, lenders and credit card issuers start charging more interest.
While a 0% APR introductory period can help you save money, you also need to look at the APR after the period ends. If the APR exceeds the interest rates on your current cards, you may end up paying more in the long run.
The introductory period can lull credit card customers into a false sense of security. You may decide to only make the minimum payments during this initial period. When the period ends, you may find yourself back where you started with a credit card that has a high APR.
Take advantage of an 0% APR offer to pay down more of your debt. For example, imagine you have $5,000 in credit card debt with an 18.9% APR and make a minimum payment of $200 per month. It would take you close to 11.5 years to pay off the card. With 0% APR for 12 months, you could pay off up to $2400 of the $5,000 balance with $200 monthly payments. Even if the subsequent APR is 18.9%, you would still pay off your card several years earlier.
You also need to review the details of the offer. As with balance transfer fees, the requirements for 0% APR introductory periods vary. For example, some credit card companies may cancel the introductory period if you miss a payment.
Pay attention to annual fees and extra charges
Consumers tend to pay attention to interest rates and initial fees while overlooking the ongoing costs. You may need to pay annual fees and other charges. The annual fee is factored into your minimum payments. Other charges may include late fees, returned payment fees, and transaction fees.
A report from CNBC claims that the average annual fee for a credit card is between $95 and $500. Some credit card companies waive the fee for the first year. You may also find offers for no-annual fee cards. However, no-annual fee credit cards often require excellent credit scores.
Do credit card balance transfers hurt your credit score?
Transferring debt to a credit card may hurt or improve your credit score. Your score depends heavily on your ability to maintain financial obligations. Missing payments hurts your score while lowering your debt improves it.
The act of transferring debt does not impact your credit score. However, applying for a new credit card to hold the balance of your debt requires a hard credit check.
Credit card companies and lenders use hard credit checks before approving applications. The inquiry allows the lender to check your credit history. Hard credit checks stay on your credit report for two years. A hard credit check can reduce your credit score by a few points. However, the impact is temporary. The main concern is whether you continue to make your monthly payments on time.
Credit card companies often report late payments to the major credit reporting bureaus each month. According to FICO, a single late payment can cause your score to drop by up to 180 points. FICO states that the biggest decreases tend to occur when you have good credit. If you already have bad credit due to multiple missed payments, you may not notice a drop of 180 points, but your score will still suffer.
You may also need to pay a late fee and the interest on the unpaid balance for each day that you are late. A late payment can also lead to additional consequences, such as the cancellation of a 0% APR introductory period.
If you continue to make payments and pay down your debt, a balance transfer may improve your credit score. Your total debt accounts for about 30% of your FICO score. Each dollar that you save on interest after a balance transfer should be used to pay down your balance and boost your credit score.
What types of balances can you transfer to a credit card?
Most major credit card companies allow you to transfer almost any type of consumer debt, including:
- Credit cards from different issuers or banks
- Automobile loans
- Student loans
- Personal loans
While most companies allow you to transfer balances from credit cards from other issuers, you cannot transfer balances to credit cards from the same company. For example, if you already have a credit card from Bank of America, you cannot complete a balance transfer with a new credit card from Bank of America.
Credit card companies also tend to place restrictions on transfers from loans. Depending on the credit card issuer, you may only be able to transfer a portion of your balance from a personal loan or a mortgage. Chase is one of the few major companies that only allow balance transfers from credit cards. The company does not accept transfers from loans or mortgages.
How do you do a balance transfer check?
Most credit card companies handle balance transfers over the phone or electronically. However, some companies may send paper checks. For example, balance transfer checks may be required by your existing credit card issuer.
The check is sent directly to you. You then make the check payable to your current credit card issuer with an amount up to the credit limit of the new card. After the check clears, the amount is added to your new credit card.
The check can typically only be paid to a credit card issuer. However, some credit card companies may choose to send a “convenience check.” A convenience check can be cashed or deposited in your standard bank account, allowing you to use it as you see fit. However, the funds from the check are automatically applied to your new credit card. If you fail to use the funds for the intended balance transfer, you simply increase your debt.
How long does a credit card balance transfer take?
A balance transfer typically takes one to three weeks, depending on the credit card company. The timeframe for the transfer is often listed on the company’s website or the credit card contract.
Here is a breakdown of the average length of time for balance transfers from the top credit card companies based on data from Experian:
- American Express: 5 to 7 days
- Barclays: 7 to 21 days
- Capital One: 3 to 14 days
- Chase: 7 to 21 days
- Citi: 2 to 21 days
- Discover: 7 to 14 days
The process may take longer if you apply through the mail compared to completing an application online. The amount of time also depends on whether the transfer of funds is completed electronically or with a paper check. For example, Discover, American Express, and Capital One state that transfers completed by mail with a check may take several additional weeks.
Should I get a personal loan or balance transfer?
Transferring the balance of a credit card to a personal loan instead of another credit card may result in lower interest rates. You may also improve your credit. However, there are pros and cons to both options.
Personal loans are a type of installment debt while credit cards are revolving debt. Revolving debt involves borrowing against a credit limit and often comes with higher interest rates. It also has a bigger impact on your credit score.
Revolving debts such as credit cards are also unsecured, which increases the risk for lenders. Due to the risk factor, credit cards have higher interest rates. Most personal loans are also unsecured, but some lenders may offer the option of securing the loan with collateral. A secured loan creates less risk for the lender, resulting in better rates for the borrower.
Personal loans may increase your monthly payments
Personal loans may help you save money in the long run by limiting the total interest that you pay. However, personal loans also typically require short-term agreements. Personal loans are available with term lengths from 12 months to 60 months. With a short-term personal loan, you may end up with higher monthly payments.
For example, you get a personal loan to cover $10,000 in credit card debt. The loan has an interest rate of 10.52%, which is lower than the average APR for a credit card. However, your monthly payments would be $464 for a 24-month term.
Transferring the debt to a credit card would likely result in lower monthly payments. According to Bruce McClary, the Vice President of Communications for the National Foundation for Credit Counseling, the minimum payment is typically 2% of your balance each month.
For example, with $10,000 in credit card debt, the minimum payment may be close to $200 per month. However, some cards add interest and fees into the minimum payment instead of using a flat percentage.
If the card includes interest and fees, the minimum payments for a $10,000 balance may increase to about $298. While your payments would be lower compared to using a personal loan, you still end up paying more interest over time.
Keep in mind that you may find a credit card offer with 0% APR for an introductory period. Use the 0% APR to pay down more of your debt. Every extra dollar that you contribute is a dollar less you are charged interest for when the introductory period ends.
What are alternatives to balance transfers?
If you do not have good to excellent credit, you may not qualify for a balance transfer. Individuals with poor or bad credit may also find it hard to qualify for personal loans. Some of the alternative options for consolidating debt include:
- Home equity loans
- 401(k) loans
- Debt management plans
Home equity loans require you to have equity in your home. However, they typically come with lower interest rates. As the loan is secured by your home, you may not need good credit. Home equity loans also come with risks. If you default on the loan, you may lose your house. You may also need to pay for an appraisal before you qualify for the loan.
401(k) loans also offer lower interest rates and do not impact your credit score. The drawback is that you need to pay heavy fees and penalties if you do not repay the loan.
If you have a significant amount of debt and are struggling to meet your minimum payments, you may need to consider a debt management plan. Debt management firms can help consolidate debt by rolling multiple debts into a single monthly payment.
When does a balance transfer make sense?
Here are a few scenarios where a credit card balance transfer makes sense:
- Your credit score has improved enough to qualify for better rates
- You are sticking to a budget and want to pay down more debt
- Your existing debt includes higher interest rates
- You have multiple credit cards that you want to consolidate
If your credit score has improved since you opened your credit cards, you may now qualify for a card with a better interest rate. Remember to look for promotional offers with 0% APR and no annual fees for the first year.
A credit card transfer can also make it easier to manage your debt. If you can stick to a budget, a balance transfer may help you pay down debt faster. You may also lock in a lower APR and avoid the hassle of managing multiple monthly payments.
What are the risks of a credit card balance transfer?
If you believe that you can stick to the monthly payments, a credit card balance transfer comes with minimal risks. The biggest pitfalls come from not looking closely at the fine print before opening a new credit card.
12 months with 0% APR and no fees can trick you into thinking that you are getting a better value compared to your current card. You need to ensure that the APR and fees after the introductory period are still lower than your current rates and fees.
Conclusion: Is a balance transfer worth it?
Do you have good to excellent credit? If so, a balance transfer may be a smart choice for saving money on your debt. Balance transfers typically come with introductory periods with no interest charges or fees, helping you pay down more debt quickly. Just make sure that the final APR is lower than your current interest rate to maximize your savings and continue conquering your debt.