A balance transfer credit card allows you to move an existing credit card debt to a new card with a lower interest rate, making it easier to chip away at your debt faster and save interest.
Balance transfer credit cards are a smart option if you need to consolidate multiple credit card balances into a single account, which makes repayments easier to manage. That said, credit card balance transfers can sometimes leave you worse off if you can’t make the most of their benefits.
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How do credit card balance transfers work?
Whether you can save money with this type of credit card comes down to several factors. Key ones include how much money you owe, your ability to repay, the card’s balance transfer rate, the length of time this rate applies and fees.
A balance transfer rate refers to a special low rate — sometimes even 0% — on an amount you transfer from another credit card. This rate is different to a credit card’s purchase rate, which is the interest rate charged on the things you buy and is usually much higher.
The balance transfer rate applies for a limited period, usually from six to 36 months. After this period, the rate reverts to a higher revert rate, which might be based on the card’s purchase rate or cash advance rate.
The cash advance rate is the interest rate on the cash withdrawn from your credit card account — this is almost always more expensive than the purchase rate.
The key takeaway is this: the longer the balance transfer rate applies, the more time you have to pay off the amount transferred at a zero or reduced rate.
How to transfer a credit card balance
You’ll include the amount you want to move across, the name of your current credit card provider and card details on your balance transfer card application.
Once the application is approved, your new provider will pay your old card account and then roll over the amount they paid into your new card account.
Applying for a card
When choosing a balance transfer card, remember that some providers restrict the amount you can move. If you can’t move the entire balance, you could end up paying interest and fees on both the old and the new card.
Let’s say you have $10,000 outstanding on your current credit card. If your new balance transfer card allows transfers up to 80% of your approved limit, then you’ll need a limit of $12,500 to move the entire $10,000 across.
Also, you can’t transfer your balance to a new card with the same bank or another bank owned by the same parent entity.
Costs and fees
Despite their potential benefits, balance transfer cards also have costs and fees. You’ll need to know these to decide if they’ll cancel out your savings.
- Interest on new purchases. Balance transfer cards tend to have higher purchase rates than other credit cards. Since repayments you make will automatically go toward the balance attracting the most interest, you could end up paying off your debt slower if you use the card for purchases.
- Interest-free days. Many providers don’t allow interest-free days on purchases until you have paid off your balance transfer.
- Annual fee. Most balance transfer cards have a cost you must pay yearly, but some may waive or reduce this fee for the first year.
- Balance transfer fee. This is typically up to 3% of the amount you want to move across.
- Other fees. These may include fees and penalties for late payments, cash advances, going over your credit limit and foreign currency conversion.
How much could you save?
You can save money if you repay the total balance during the low-rate period. Still, the amount you can save depends on the size of your debt, the interest you’re currently paying, the length of the low-interest or interest-free offer and the fees involved.
For example, let’s say you owe $6000 on your current credit card, which has an annual interest rate of 19.94%. If you’re repaying $250 each month, it will take 31 months to pay off the balance fully, and it would cost $1555 in interest.
If you move the balance to a card with a balance transfer rate of 0% pa for 24 months, you could pay off the balance in full without interest. However, this scenario does not factor in any fees or charges you may need to pay. It also assumes you’ll continue to repay $250 each month and won’t use the card to make new purchases.
It’s equally essential to point out that if the balance isn’t repaid in full before the revert rate kicks in, you might be charged a higher interest rate than what you paid initially and end up with no savings or be worse off.
Getting your first credit card? Whether you’re a beginner or a credit card pro, make sure you know how to handle a credit card responsibly. It’ll save you time, money and frustration.
Is it worth transferring a credit card balance?
If you have multiple credit card debts, combining them into a single amount might be appealing. It may:
- Ease the burden and confusion of making payments on several cards each month.
- Reduce fees if you’re paying an annual fee for each card.
- Lower interest or you may even pay no interest for a set period so you can pay off your debt faster.
However, it might be tempting to use your old card (if you haven’t cancelled it yet). You might also use the new balance transfer card at the store, which means repaying at a much higher purchase rate. So, it’s important to be realistic about how much you can repay during the low-rate period and whether you can solely focus on paying down the balance.
Additionally, if you’re transferring a balance multiple times, it’s likely a sign that you’re struggling to repay it. In this case, you might be better off creating a budget and a repayment plan rather than moving it again.
Frequently asked questions about credit card balance transfers
Making multiple balance transfer applications in a short time can harm your credit score and signal to lenders that you’re having trouble managing money.
Not all cards allow balance transfers. For example, you can’t transfer balances to a no-interest, flat-fee credit card.