How does a balance transfer work?

Curious about balance transfers? People with credit cards may receive ads or offers suggesting they transfer their current balance to a different card provider.

This article includes tips, suggestions and general information. We recommend that you always do your own research and consider getting independent tax, financial and legal advice before making any important decision.

Read this article to learn what a balance transfer is, how it may work, and potential ways to use it wisely.

What is a balance transfer?

A credit card balance transfer generally occurs when a person moves their outstanding balance from one credit card to another. It may also be possible to move balances from several credit cards onto one single card.

Understanding the terms and conditions of any new credit card is crucial before proceeding with a balance transfer.

Potential benefits of balance transfers

People may transfer credit card balances for various reasons. Common benefits include:

• Interest rate relief: Balance transfers may be used to receive lower interest rates offered by some credit cards for an introductory period.
• Debt consolidation: Individuals may opt for a balance transfer to consolidate multiple credit card debts onto one card, potentially simplifying repayments and helping them gain financial clarity with a single interest rate on that debt.
• Lower monthly repayments: With an introductory period of lower interest rates, people may find the monthly interest payments more manageable, potentially making repayments more affordable.

Potential drawbacks of balance transfers

There are possible risks and disadvantages associated with balance transfers, such as:

• Credit score changes: A person’s credit utilisation ratio is the amount of credit they use compared to their total credit limit. A balance transfer may affect this ratio.
• Balance transfer fees: Balance transfers often come with fees. These transfer fees are typically calculated as a percentage of the transferred amount. In other words, the greater the balance amount, the greater the associated fee.
• Balance transfer limits: Some credit card providers may impose limits on the amount people can transfer.
• Jump in interest rates: The low or zero per cent interest rates offered during an introductory period may attract people. However, they are temporary. Interest rates may revert to the card's standard rates after the introductory period ends. In some cases, they could be higher than someone’s previous card(s).

How to do a balance transfer

The steps to undertake a credit card balance transfer can differ by card provider. Here’s what the process may look like:

• Check eligibility: Ensure eligibility criteria set by the credit card provider are met, including credit score requirements.
• Apply for new card: Apply for the selected credit card, which will include providing personal and financial information.
• Await approval: Upon approval, review the credit limit granted on the new card.
• Make transfer: Contact the new credit card provider to request a balance transfer.
• Verify transfer: Confirm the balances have been successfully transferred from the previous card to the new card. The process may take a few weeks.

Potential mistakes to avoid

Here are some potential missteps to be aware of:

• Ignoring post-transfer interest rates
• Missing introductory deadlines
• Closing old accounts too soon
• Transferring to the wrong card
• Overlooking transfer fees
• Exceeding credit limits

Understanding potential balance transfer fees and interest rates

Consider the following factors in advance of completing a balance transfer:

• Balance transfer fees: These one-time fees are often charged by the new credit card issuer for transferring a balance from an existing card.
• Introductory 0% APR periods: Credit cards may offer an initial period with 0 per cent annual premium rate (APR) on balance transfers. But that may not apply to new spending. Read the fine print. Be aware of the specific duration as it can vary among credit cards.
• Expiry of 0% APR periods: After the introductory period expires, a credit card's standard interest rate normally applies to any remaining balance.

Things to consider before doing a balance transfer

Check out these balance transfer tips before getting started:

• Carefully compare credit card providers.
• Check current credit card balances.
• Know the current (and future) cost of interest.
• Get up to speed on any balance transfer limits.
• Find out about percentage fees for balance transfers.
• Understand interest rates for additional card spending.
• Plan ahead for the end of introductory zero-rate periods.

Smart spending — and only spending within one’s means — may potentially help people meet repayment deadlines and pay off full balances to avoid excessive interest.