What Is a Credit Card Balance Transfer?

If you’re reading this, you probably own a credit card, am I right? As we lobby for an even greater cashless society, credit cards become more helpful in managing cash flow, making secure online and offline purchases, earning rewards, and building your credit score. 

But there’s an inherent danger to owning a credit card; let’s be honest here — being able to make purchases without paying for them upfront can, if you’re not careful, plunge you into a debt pool that feels impossible to swim out of. 

According to Federal Reserve Bank of New York reports, gross household debt has increased by $109 billion, due, in part, to credit card bills. If you are neck-deep in debt, investing in a credit card balance transfer can be a solid path to financial relief. 

Under the right circumstances, a balance transfer can help you regain control of your finances. It can save you money on interest payments and provide a simpler debt repayment plan. 

Then again, this isn’t a one-size-fits-all solution, so it doesn’t apply to every borrower. Therefore, understanding what it is and how it works will make a big difference in managing your debt. 

KEY TAKEAWAYS

• A balance transfer involves moving your existing debt from one of your credit cards to another.
• Moving debt to a card with a lower interest rate gives you the most advantage.
• There may be fees, and getting the timing right helps you avoid extra charges.

What Does Balance Transfer Mean?

Let’s address the main question here: What does a balance transfer mean? A balance transfer is a transaction where you move credit card debt from one of your credit cards, typically a card with a high interest rate, to another with a low interest rate. 

When used properly, a balance transfer credit card helps you take advantage of lower interest rates or sometimes no interest for a promotional period. That can help you zero in on what’s most important: paying off the principal — the actual amount you owe — instead of losing money to monthly interest payments.

Case in point: Let’s say you have a card with $6,700 of debt (which is the national average) and a 23% interest rate. This means you’re accruing interest at about 1.92% per month. Each month, approximately $128.64 ($6,700 × 0.0192) is added to your debt just from interest. If you make a monthly payment of $200, only about $71.36 goes toward reducing your principal balance, while the rest covers the interest. This makes it slow and challenging to pay off the debt. 

If you’re unable to keep up with your monthly payments, the unpaid interest gets added to your principal, so next month’s interest is calculated at an even larger amount. This can quickly escalate your debt, making it increasingly difficult to manage.

With a balance transfer, you may get a period during which every dollar paid goes straight to reducing your actual debt, with no interest charged to the balance. When the window closes, you go back to paying off your debt with interest. 

What is a Balance Transfer Credit Card?

A balance transfer credit card is a specific type of card designed for debt management. These cards often offer a low or 0% annual percentage rate (APR) for a set period, making them ideal for transferring high-interest debt. However, they typically come with a transfer fee, usually between 3% and 5% of your transfer amount. 

Going back to the earlier example, a 3% transfer fee for a $6,700 debt amounts to paying an added $201. However, some credit card companies will waive the fee if you complete the transfer within a set period.

Balance transfer credit cards also work if the debt is spread across several cards or accounts. All you have to do is consolidate your debt onto a single credit card, so you don’t have to keep up with the different minimum payments, due dates, fees, etc. That makes debt repayment across those multiple cards a lot easier. 

How Does a Credit Card Balance Transfer Work?

While the process involved in getting a balance transfer credit card varies across card issuers, getting one going might be easier than you think. Here’s a step-by-step guide on how it works.

Apply for a Card

The first step to setting up a balance transfer is applying for a balance transfer credit card. You want a card with a 0% introductory annual percentage rate (APR) that extends long enough to erase your debt or significantly reduce your payment, and many of the most exclusive credit cards possess this. 

Quick tip: To qualify for a balance transfer credit card, you must have good or excellent credit. Likewise, you usually can’t apply for a balance transfer with the company that houses your credit card debt. For example, having a balance on an Amex card might mean being ineligible for an Amex balance transfer card. Although, you should check with your issuer to be sure.

Request a Balance Transfer

Some credit card companies let you request a balance transfer during your application. Otherwise, you must wait post-approval to set up the balance transfer. You can do this via your card account online, the issuer’s app, or customer service. 

Once your application is approved, you initiate the balance transfer by providing details of the debt you want to move, including the issuer’s name, account number, and the amount you wish to transfer.  

Wait for the Transfer to Complete

Balance transfers often take time to approve, and this waiting period can vary between three business working days and a couple of weeks. But while you wait, keep paying at least the minimum on your old card to avoid late fees or penalties. 

Once everything’s processed, your new card issuer will pay off your old balance and transfer that amount (plus any fees) to the new account.

Set up a Repayment Strategy

Use that interest-free period wisely: repay as much of your transfer balance as possible before the 0% introductory APR period ends. Once that window closes, the credit card company will subject any remaining balance to their standard interest rate. This rate could be the same as your previous card’s or higher. 

Common Mistakes to Avoid

While credit card balance transfers can be a financial lifesaver, they come with risks. Knowing what to look out for can help you avoid potentially costly mistakes. Here are three common pitfalls to watch for:

Ignoring the Fees

Take the time to make smart decisions regarding your finances. While 0% APR is quite the deal, you don’t want to overlook the transfer fee. You want to do the math beforehand to see if applying for a balance transfer is worth it.

Missing Payments

A 0% APR introductory rate doesn’t mean you can skip the minimum monthly payment. If you miss a payment, you could lose your promotional interest, leaving you with a much higher APR for the remainder of your debt. Setting up automatic payments is a great way to stay ahead of your monthly payments.

Failing to Pay Off the Balance

The most important thing about a balance transfer is the window it creates for interest-free debt repayment. Ideally, you will pay your debt in full by the end of the promotional period. Failing to do so will have you back to paying off your debt with interest — sometimes at a rate higher than your original cards.

No matter in which country you are when faced with credit card debt, setting up a credit card balance transfer can help you manage your debt and save on interest. 

Again, before applying for a balance transfer, you should evaluate your bills, review the terms, calculate costs, and prepare a realistic repayment plan that leverages the promotional period. 

FAQ

Who Is Eligible for a Balance Transfer?

You may only need a FICO score of at least 670 to qualify for a balance transfer. However, having good or excellent credit doesn’t guarantee approval. For more information about approval, reach out to the card issuer.

What Types of Debt Can You Move to a Credit Card?

Most balance transfer credit card issuers only allow transfers from credit cards. However, it is sometimes possible to transfer the balance of personal loans, although this is rare.

Should You Get a Personal Loan Instead of a Balance Transfer?

Several factors influence your choice between a personal loan and a balance transfer. If your debt exceeds the credit limit on a new card, you need more time to pay it off, or you have a low credit score, a personal loan might be a better fit. While personal loans usually don’t offer interest-free intro periods, they often have lower rates than credit cards, especially when borrowing from banks and other financial institutions.

Should You Focus on One Balance?

Paying debts spread across multiple cards can be a hassle for many. The best solution is to consolidate the various balances into one card. That way, you’re only concerned with one lump payment, and you could benefit from a reduced monthly payment.