What to know about balance transfers

A balance transfer can be an appealing option to get better interest rates or APR. They may potentially help borrowers save money when they pay off their debt. Balance transfers can also help consolidate several bills or types of debt into one account for easier management of payments. Transferring several balances onto one credit card may help borrowers gain a better idea of how much they owe and budget for the monthly payments.

In this guide, let’s delve into the world of balance transfers to identify what a balance transfer is and how they may potentially help borrowers manage their debt more effectively.

What is a balance transfer?

A balance transfer is a type of credit card transaction that allows borrowers to move debt from a credit card or loan to another credit card. Many balance transfer credit cards offer a period of 0% APR, which may help borrowers repay their debt quickly because interest will not build on their balance while the 0% period is in effect. The length of the 0% offer depends on the provider and card, but typically is between 9 and 21 months.

With a balance transfer, if borrowers can pay more than the minimum payment each month, they may save money on repaying their debt by reducing the balance that is subject to interest or by paying off a balance before interest applies.

How to perform a balance transfer

If borrowers are considering a balance transfer, here are some general steps to take:

• Check eligibility: Credit card providers will determine who is eligible for a balance transfer based on their income and credit score. Typically, those with higher credit scores may be more likely to be approved for a balance transfer¹. It is important for borrowers to check that they qualify before they apply to avoid a negative impact on their credit score as the card issuer will run a hard inquiry on their credit report².
• Choose the right credit card: Borrowers should research different balance transfer credit cards that are available and compare them. Factors to consider include APR, the length of the low or 0% APR period, and any balance transfer fees. Borrowers should evaluate all options and consider seeking financial advice before deciding.
• Apply for the balance transfer credit card: When borrowers find a suitable balance transfer credit card, they can begin the application process. Applying for a balance transfer credit card is often completed online, but borrowers may also be able to do this at their bank if offered. Borrowers will need to provide personal information such as their Social Security number, date of birth, income information, and details of their monthly expenses. Once accepted, they are a step closer to initiating the balance transfer. Depending on the provider, balance transfers may not be able to be initiated until the cardholder has received the credit card.
• Initiate the transfer process: Follow the instructions from the balance transfer credit card provider to initiate the process. During this step, borrowers will need to have the details of the credit cards or loans they wish to transfer and the balances that remain on them. Enter these details to initiate the transfer process.
• Common mistakes to avoid: Borrowers should make sure they qualify for the credit card before they apply so as not to affect their credit score³. They should also make sure that the credit available on the balance transfer card enables them to transfer their existing debt. Balance transfer fees will increase this amount, so make sure there is room for existing debt plus fees. Borrowers should avoid late payments on the new card and consider setting up a pay-off plan to make sure they get the most from their balance transfer. Borrowers should also avoid running up new debt on the old card. Late payments or missed payments may nullify 0% or low interest offers. New purchases made with the card may still accrue interest. Be sure to review all terms and conditions before using any credit card.

Understanding balance transfer fees and interest rates

Most providers will charge balance transfer fees. This is the fee for transferring the balance from one card to another. This is typically between 3% and 5% of the transfer amount but can vary between providers.

For example, if a borrower were to do a balance transfer of $5,000 from a high-interest rate credit card to a 0% APR card that had a balance transfer fee of 3%, the breakdown of their balance transfer would be:

Balance transfer fee = $150

Total balance on new balance transfer credit card = $5,150

It is also important for borrowers to evaluate the introductory APR period, which is often 0% for the first 9–21 months, and the interest rates after this period. If there is still debt on the card after the promotional period, the interest rate will then be applied to the debt.

What to consider before making a balance transfer

Here are some things to consider before applying for or making a balance transfer:

• Research and compare offers: With many deals available, it is important to research and compare them to find the right fit for one’s situation. It may be useful for borrowers to seek financial advice to help them make informed decisions.
• Set up a repayment plan: Borrowers can set up to help them clear or significantly reduce the debt within the introductory period to get the most from the balance transfer and help them better manage their money. Borrowers could consider making a personal budget to evaluate how much they can pay each month and set up automatic payments if available.
• Be mindful of deadlines: Plan out what needs to be done and by when. Make note of the date that the introductory period ends and aim to pay off the debt by then if possible.

Potential benefits of balance transfers

There are many reasons why a borrower might want to do a balance transfer. Potential benefits include:

• Save money on interest rates: Transferring a balance from a high-interest credit card to a 0% APR balance transfer credit card may help borrowers save money on interest rates. It may also help borrowers repay the debt faster, as their payments will lower their total balance with no interest being added during the 0% period.
• Consolidate debt: A balance transfer can help to consolidate debt. If a borrower has $2,000 on one high-interest credit card and a bank loan of $1,500, they could transfer both balances to a balance transfer credit card (if available credit limit on the card allows) and make one monthly interest-free payment. This can not only help save money on interest rates, but also potentially make debt easier to manage and budget for.
• Improve credit score: Doing a balance transfer can help borrowers repay their debt, which may help improve credit scores. If a borrower repays their credit card debt, it can improve their credit utilization ratio. This is the percentage of available credit that is being used.
• Lower monthly payments: Lower interest rates and debt consolidation may lead to lower monthly payments. Also, if a borrower has a 0% APR balance transfer credit card, the whole of their monthly payment will be deducted from their debt as there is no interest to pay.

Potential drawbacks and risks of balance transfers

There are some potential drawbacks and risks that borrowers should consider when doing a balance transfer. These may include:

• Impact on credit scores: While a balance transfer can potentially help to improve credit scores in the long term, there may be some negative effects initially, so it is important to monitor credit scores³.
• Balance transfer fees: Note the balance transfer fees and factor them into the total cost.
• Balance transfer limits: Borrowers need to make sure the balance transfer credit card has a big enough limit to enable them to transfer their debts plus the balance transfer fees.
• Missed or late payment penalties: Missed or late payments may cancel 0% offers, so payments should always be made on time.
• 0% interest offer limitations: New purchases made on the balance transfer card may still have interest applied. Review terms and conditions before making a purchase. It may be wise to pay off the balance on the card before making any purchases.

While balance transfers may provide a solution to curbing interest charges and potentially make it easier to pay down debt, it’s important to remember that any balance left on the card after the promotional period will begin accruing interest. Anyone seeking to use a balance transfer card should be sure to only spend within their means and develop a plan to pay down their debt.