What is a Balance Transfer on a Credit Card?

Balance transfers can be a helpful tool if you're dealing with credit card debt. But what exactly is a balance transfer, and could it help you manage your finances better?

Let's break it down in simple terms.

Balance transfer basics

A balance transfer moves existing debt from one or more credit cards to another card with better terms. Your total debt doesn't change, but you might save money by moving it to a card with a lower interest rate.

Many balance transfer cards offer low or 0% introductory rates for a limited time—typically 6 to 21 months. During this period, your debt won't accumulate interest (or much less), giving you a chance to make more progress paying down what you owe.

How balance transfers work

The process is straightforward:

• You apply for a balance transfer credit card

• If approved, you request to transfer balances from your existing cards

• The new card company pays off your old cards

• Your debt moves to the new card with the promotional rate

For example, if you have $5,000 spread across three cards with 18-24% interest rates, you might transfer all that debt to a new card offering 0% interest for 12 months.

Benefits of balance transfers

• Lower interest costs: The main benefit is saving on interest charges during the promotional period.

• Simplified payments: Instead of juggling multiple due dates and minimum payments, you'll have just one bill.

• Faster debt payoff: With more of your payment going toward principal rather than interest, you can eliminate debt more quickly.

• Potential credit score improvement: Reducing your overall credit utilization and paying down debt can positively impact your credit score over time.

Drawbacks to consider

• Transfer fees: Most cards charge a balance transfer fee of 3-5% of the transferred amount. On $5,000, that's $150-$250 upfront.

• Qualification requirements: The best balance transfer offers typically require good to excellent credit (usually scores of 670+).

• Temporary promotional rates: When the introductory period ends, the remaining balance will be subject to the card's regular interest rate, which could be high.

• Temporary credit score impact: Applying for a new card causes a hard inquiry on your credit report, which may briefly lower your score.

Is a balance transfer right for you?

A balance transfer makes the most sense if:

• You have good credit

• You have a solid plan to pay off the debt during the promotional period

• The interest savings outweigh the transfer fees

• You'll avoid adding new debt to your cards

Before applying, calculate whether the interest savings will exceed the transfer fees. Also, read the fine print about what happens if you miss payments (many cards cancel the promotional rate if you're late).

Watch out for these common pitfalls

• Making only minimum payments: This wastes the interest-free period and leaves you with a large balance when regular rates kick in.

• Adding new purchases: Some cards apply the promotional rate only to transferred balances, not new purchases.

• Missing the transfer window: Many cards require you to complete transfers within 60-90 days of opening the account.

• Closing old accounts: Keeping old accounts open (but not using them) can benefit your credit utilization ratio.

Making the most of a balance transfer

Balance transfers can be a powerful debt management tool when used strategically. The key is having a clear payoff plan before you apply. Calculate how much you need to pay monthly to eliminate the debt before your promotional rate expires, and stick to that schedule.

Remember that a balance transfer doesn't reduce your debt—it just gives you better terms to pay it off. Use this opportunity wisely by avoiding new debt and consistently making payments larger than the minimum required.