What Is A Balance Transfer: How It Works, Credit Score Impact, Fees & More
A balance transfer is when you repay existing debt with a new credit card. This moves, or transfers, your balance to the new card but does not reduce the amount you owe. Instead, the point of a balance transfer is to get a lower interest rate, save money on finance charges and pay off what you owe much faster. In fact, the average household – which owes more than $8,000 to creditors – could save well over $1,000 with one of the best 0% balance transfer credit cards.Compare Balance Transfer Credit Cards
All major credit card companies allow you to transfer credit card debt to a new credit card account, according to WalletHub’s Balance Transfer Policy Report. Certain issuers also allow you to transfer balances from auto loans, student loans, small business loans, payday loans, HELOCs, and mortgages.
But a balance transfer isn’t always a good idea. You generally need good or excellent credit to get a 0% balance transfer APR. Many cards have pricey balance transfer fees. And most have very high regular APRs. So if you transfer your balance to the wrong card or don’t pay it off soon enough, it could end up costing you.
To determine whether a balance transfer is right for you, you first need to understand how the process works, what costs are involved and how it may affect your credit standing. We’ll discuss those issues and more below.
How Do Balance Transfers Work?
When you transfer a balance to a credit card, that card’s issuer pays off your debt with the original lender, which could be another credit card company or lender. This satisfies your original agreement and shifts your payment obligation to the new card’s issuer. The original lender cannot prevent you from transferring away a balance, as all they see is a payment being made on your behalf.
You can request a balance transfer when you apply for a new credit card or at a later date. But sooner usually is better. Many credit card companies offer reduced interest rates and fees on balances transferred within a couple months of account opening.
Here’s what you’ll need to do a balance transfer:
- The account number for your existing balance;
- The dollar amount you wish to transfer;
- Standard credit card application information, including your name, Social Security number, employment information and income.
After you transfer a balance to a credit card, you will be responsible for paying at least the minimum amount required by the issuer each month. This amount will be listed on your monthly bill. Paying that by the due date will keep your account in good standing and allow you to keep any 0% intro APR your card may offer. But you’ll need to pay more than the monthly minimum at some point because cards with low intro balance transfer rates typically have pretty high regular APRs. So if you carry much of a balance beyond the low-rate intro period, it won’t take long for any money you’ve saved to turn into extra costs.
Types of Balances Transferable to a Credit Card
The types of balances that you can transfer to a credit card depend on which bank you get your card from. The graphic below illustrates the policies for the 10 largest credit card issuers in the United States.
Source: WalletHub 2013 Balance Transfer Study
What Is a Balance Transfer Fee?
The average credit card balance transfer fee is 2.62% of the amount you transfer, according to WalletHub’s latest Credit Card Landscape Report. But some credit cards charge as much as 5%. A transfer fee helps cover both the cost of processing the transaction and the risk that comes with assuming your debt. That’s because the issuer of the card you’re transferring your balance to charges this fee, not the lender you’re transferring your balance from.
There usually are a fair number of credit cards with no balance transfer fee. But most don’t offer a 0% balance transfer APR. Every so often, however, a free balance transfer credit card comes along. Such cards charge neither a transfer fee, nor interest for the first few months and typically are available only to people with good or excellent credit.
Getting a 0% balance transfer credit card with no balance transfer fee is the only way to entirely avoid paying finance charges on transferred debt. But you can always minimize what you pay for a balance transfer by comparing offers in terms of their total cost: transfer fee, annual fee, and total interest expected based on your payoff timeline. A credit card calculator will prove extremely helpful in this regard.
Calculating the total cost of a balance transfer is critical because so many different factors affect whether this type of transaction is worth doing. And it’s easy to overlook even the most important ones. Clearly, balance transfer fees can prove quite expensive, having potential to offset savings from a lower interest rate. But people often fail to appreciate their significance before the fact. That’s largely the balance transfer fee is one of the least clearly represented account terms on credit card applications, according to WalletHub’s annual Credit Card Application Study. So make sure to have your eyes peeled.
You can learn more about balance transfer fees from WalletHub’s guide on the subject.
Balance Transfer Rewards
In theory, a balance transfer represents a great opportunity to earn rewards. Credit card companies offer rewards on every dollar you spend, after all. And transferring a balance means drawing down your credit line to pay off an existing debt obligation. That’s usually a high-dollar-value transaction.
Unfortunately, most credit card companies specifically exclude balance transfers from rewards earning eligibility. Not all of them have such policies, though. As of 2018, Barclays is the only one of the 15 largest credit card issuers that allows you to earn rewards on transferred debt with some of their cards
You can see whether a given card offers balance transfer rewards by reading the fine print of the card agreement. Keep in mind, however, that just because a balance transfer card offers rewards doesn’t mean it’s a good deal. It just means you need to factor the value of the rewards into your calculations.
Do Balance Transfers Hurt Your Credit?
A balance transfer does not affect your credit standing directly. Balance transfers aren’t recorded on credit reports, and credit-scoring companies don’t factor them into their models. But a balance transfer can lead to changes in your financial profile that will affect your credit score.
Here’s how a balance transfer could impact your credit:
Credit Utilization: A balance transfer can alter your credit utilization ratio – a key component of the Amounts Owed portion of your credit score. Credit scoring companies calculate utilization for each of your credit lines individually as well as for all of them combined.
As long as you don’t close the account you’re transferring your balance from, your overall utilization will fall. Your new account’s individual utilization will depend on the limit you receive.
- Overspending: Balance transfers can hurt you in the long run if you use them to support bad spending habits. Prior to the Great Recession, it was common for consumers to hop from 0% credit card to 0% credit card, only making minimum payments yet still avoiding interest on growing debts. But you’ll have to pay for what you charge at some point, and risky spenders found that out the hard way when 0% offers dried up during the credit crunch. Many were unable to pay off the balances they had amassed, especially given the added pressure of expensive finance charges. And they wound up missing payments, even defaulting on their obligations, and ruining their credit in the process.
- New Credit: Each time you open a new credit card account, your credit score takes a temporary dip that can last 3-6 months. Unless you have a major financial event in the near future – such as applying for a mortgage – this should not be a concern.
Balance Transfer Tips
- Check Your Credit Score: 0% balance transfer credit cards typically require good or excellent credit for approval. So it’s a good idea to see where you stand before picking a card and applying.
- Decide How Much to Transfer: A balance transfer doesn’t have to be for the full amount you owe. Partial transfers are not only acceptable, they’re actually wise. They allow you to take advantage of a card’s 0% intro period without worrying about how regular rates will affect the portion of your balance that you cannot pay off during the intro term.
- Make a Payoff Plan: Balance transfer credit cards must be used strategically, or not at all. That means you should only get one for a specific purpose and with an exit strategy in mind. A credit card payoff calculator can tell you what monthly payments you’ll need to make to be debt free by the time regular rates kick in, or how much you’ll save with a predetermined payment in mind.
Don’t Assume 0% Rates Will Always be Available: As mentioned above, the availability of 0% balance transfer credit cards isn’t a given. You should therefore approach each balance transfer that you make as if you’ll have no choice but to pay regular rates at the conclusion of the introductory period.
If you are able to transfer another balance down the road, great. But banking on it is a recipe for a less robust bank account.
Understand the Various Ways One Can Leverage Balance Transfers: A balance transfer credit card’s most obvious value is as a debt management tool. The right card can help you save on interest and thus escape debt at the lowest possible cost. That’s the case whether you’re leveraging a balance transfer to pay off a lone revolving balance or as a means of debt consolidation.
Interestingly enough, you can also use a balance transfer as a savings mechanism. If your bank account’s interest rate is high enough, leaving the majority of your would-be monthly credit card payments in the bank during a balance transfer credit card’s interest-free introductory period can be worthwhile. But this strategy is only advisable if it doesn’t become an excuse to spend more than you otherwise would.
Carefully Compare Offers: There are usually lots of different balance transfer credit cards available. Getting the best deal requires figuring out which ones you’re eligible for, then comparing the total savings available with each. Balance transfer savings depend on a card’s interest rates, fees, and introductory period (if applicable).
Consumers too often home in on one particular aspect of a balance transfer offer – typically the length of its 0% term. But it’s important to consider the overall impact of all potential costs.
- Keep Your Original Account Open: Even if you aren’t going to continue using the account from which you transfer a balance, you should still keep it open. This will prevent your overall credit utilization ratio from changing for the worse. Just make sure your card does not charge an annual fee.
Don’t Use a Transfer as an Excuse to Overspend: Thinking, “I’m not getting charged interest, so it doesn’t really matter how much I spend,” is the worst mindset you can have when it comes to a balance transfer. You’re going to have to pay up at some point, so make sure to use a balance transfer credit card in accordance with a well-thought-out budget.
Otherwise, any savings you score will quickly be erased by finance charges when regular rates take effect. You may even incur significant credit score damage if you can’t foot the bill.
- Don’t Make New Purchases with Your Balance Transfer Card: Anytime you carry a credit card balance from month to month, there is no grace period for purchases. That means any purchase you make will begin accruing interest immediately, unless your card has a 0% purchase APR. So it’s best to use a rewards credit card for spending.
To determine the proper transfer amount, start by identifying the monthly payments that you can comfortably afford to make. Then multiply that figure by the number of months you’ll have a low introductory interest rate.
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