Balance Transfer 101

By Dawn Kellogg

A Balance Transfer can save you money by moving your debt from a high-interest credit card, to one with a lower APR. But how do they work and is it right for you?

What is a Balance Transfer?

The transaction in which you move debt from a high interest credit card to one with a lower interest rate is called a balance transfer. Theoretically, a balance transfer will make it easier to pay off debt with more money going to the actual debt, rather than just paying interest.

Balance transfers are usually only available to consumers with “good” to “excellent” credit scores. That said, credit scores alone aren’t a guarantee of approval for a credit card. Issuers take income, debt levels, and credit activity into consideration.

You generally cannot transfer balances between cards from the same issuer. For example, if you have a debt on a card from X Bank, you can’t transfer it to another type of card from that same financial institution.

Is a Balance Transfer Right for Me?

A balance transfer is perfect for someone who is struggling to pay off their credit card debt as the interest makes up so much of the monthly payment. When most of your monthly payment is going to pay the past month’s interest, it’s time to consider transferring that debt to a lower interest card.

That said, you don’t have to be struggling to benefit from a balance transfer. Shopping around and finding a lower interest rate on a credit card is just smart consumerism. If it saves you money in the long run, transferring balances could be a good move.

Before doing your transfer, do the math to make sure that the balance transfer fee is worth it. If you have a debt and only need a couple of months to pay it off, you might be better off leaving it where it is and paying off the current card. That’s because with many cards there is a 3% or 5% balance transfer fee. The interest you save on a short-duration transfer might be less than the actual transfer fee.  But if you have a debt that would otherwise take several months or more to pay off, a balance transfer could be ideal.

How much you can transfer depends on your credit score. You may only be able to transfer a portion of your total debt, but by doing the math, you still may be saving money in the long run.

How to execute a balance transfer

1. Apply for a card. Be sure to shop around. Find the APR and transfer fee (if applicable) that works for you and your pocketbook.
2. Set up the balance transfer. Many issuers have balance transfer options on their websites or apps. Alternatively, you can call the customer service line. You will be asked to provide information on the debt that you are moving.
3. Wait for the transfer to go through. Once the balance transfer is approved, which can take as long as a couple of weeks, the issuer will pay off your old account directly. The old balance, plus the balance transfer fee (if applicable), will show up on your new card’s statement.
4. Pay down the balance. You will now be responsible for making monthly payments on your new account. If you pay it off during the introductory APR period (if there is one) you could save a lot of money.

Think beyond your Current Debt

Transferring balances is a great first step, but it is important to think ahead, be hands on with your debt, and alter any habits that may have led to it. Think about using debit or cash to make purchases instead of your card. This will help you to pay off balances faster, rather than accrue even more debt. Craft a repayment plan for yourself. Late payments can result in penalties that are even higher than the card’s normal rate.