What Is a Balance Transfer Credit Card and How Does It Work?
If you're facing a mountain of credit card debt you're not sure you can come back from, a balance transfer credit card could be just the tool you need.
But before you can use this tool, it's important to understand all the intricacies of it. Knowing a little about how balance transfer credit cards work will go a long way in your quest to manage your debt.
What is a Balance Transfer Credit Card?
A balance transfer credit card is a credit card to which you can transfer an existing balance from a different card (or cards). It's not a good move to use the balance transfer credit card for purchases because it will slow you down as you're reducing your balance. After you've paid off the balance, you can consider using the card for purchases.
Most balance transfer credit cards offer an introductory interest rate that is much, much lower than the rate on a regular card. The introductory rate expires after a set period of time, though. Usually, the introductory rate on a balance transfer credit card will last approximately one year.
Why Would I Want a Balance Transfer Credit Card?
Well, to transfer a balance, of course.
A balance transfer can help you pay off your debt, which will greatly improve your finances and your credit score.
If you transfer a balance from a card with a high interest rate to a balance transfer card with a low introductory rate, then you can pay down the balance and make more progress because you’ll pay less interest. This is one of the greatest tools out there when it comes to paying off debt.
What Are the Benefits of a Balance Transfer Credit Card?
Benefits of a balance transfer card include:
- A low introductory interest rate
- The chance to consolidate credit card debt
- The chance to pay off credit card debt faster
Most balance transfer credit cards offer a low introductory rate. By utilizing that rate, you can pay much less interest over the life of the balance. This is the greatest feature of these cards. However, being able to consolidate multiple balances onto one card can also be a nice feature. This way, you only have to deal with one interest rate and one monthly payment. This can certainly give you peace of mind as you work to pay off your debt.
What Are the Disadvantages of a Balance Transfer Credit Card?
The disadvantages of a balance transfer credit card are manageable if you pay attention to the terms and conditions of your card.
Disadvantages include:
- A balance transfer fee
- Expiration of introductory rate after period of time
- Purchases will have a different, higher rate of their own
- Cash advances may not be possible
Balance transfer cards often charge a fee to complete the transfer. The fee is usually around 3% of the total balance you want to transfer. For instance, if you want to transfer a $3,000 balance onto the card, then you’ll pay $90 to make it happen. The $90 will be added to the balance, and will most likely be available to pay off at the same introductory rate as the balance transferred.
Be sure to check the terms and conditions for information about the fee, as well as the length of the introductory period. The introductory rate won’t last forever, and you’ll want to be prepared when it expires.
The introductory rate will most likely NOT cover any purchases you make on the card. Purchases may be charged the rate offered after the introductory period or a higher rate reserved for just for purchases. The same can be said for cash advances. If the card offers the possibility of a cash advance, the rate is sure to be much higher than the introductory rate. It could possibly even higher than the rate offered for purchases.
Below is a breakdown of how different APRs (such as a balance transfer APR and purchase APR) can affect the distribution of your monthly payments. In other words, why you shouldn't make purchases on your balance transfer credit card:
Credit Cards: Different APRs on Different Balances
| Credit Card Interest Rates | 15.99% APR on Purchases, 0% APR on Balance Transfers | 0% APR on Purchases, 15.99% APR on Balance Transfers | 15.99% APR on Purchases, 4.99% APR on Balance Transfers | 15.99% APR on Purchases, 15.99% APR on Balance Transfers |
|---|---|---|---|---|
| Purchase APR | 15.99% | 0% | 15.99% | 15.99% |
| Purchase Principal | $5000 | $5000 | $5000 | $5000 |
| Interest Charged on Purchase Principal | $65.71 | $0 | $65.71 | $65.71 |
| Balance Transfer APR | 0% | 15.99% | 4.99% | 15.99% |
| Balance Transfer Principal | $5000 | $5000 | $5000 | $5000 |
| Interest Charged on Balance Transfer Principal | $0 | $65.71 | $20.51 | $65.71 |
| End of Month Principal Owed | $10,000.00 | $10,000.00 | $10,000.00 | $10,000.00 |
| Total Interest Charged on End of Month Principal | $65.71 | $65.71 | $86.22 | $131.42 |
| End of Month Balance Owed | $10,065.71 | $10,065.71 | $10,086.22 | $10,131.42 |
| Total Monthly Payment | $500 | $500 | $500 | $500 |
| - Portion of Monthly Payment Toward Lowest-APR Balance | $165.71 | $165.71 | $186.22 | $231.42 |
| - Portion of Monthly Payment Toward Highest-APR Balance | $334.29 | $334.29 | $313.78 | $268.58 |
| New Purchase Principal | $4,731.42 | $4,834.29 | $4,751.93 | $4,815.71 |
| New Balance Transfer Principal | $4,834.29 | $4,731.42 | $4,834.29 | $4,815.71 |
| New Total Balance | $9,565.71 | $9,565.71 | $9,586.22 | $9,631.42 |
How Do I Recognize a Good Balance Transfer Credit Card?
Good balance transfer credit card offers:
- A low introductory rate
- A long introductory rate period
- A low balance transfer fee
- A relatively low rate once the introductory period expires
It’s not impossible to find balance transfer credit cards with introductory rates as low as 0%. That’s right: ZERO percent.
A typical introductory rate period lasts approximately one year. It may be possible to find a period that lasts longer, but one year is average. Look for cards with a 3% balance transfer fee or less. You may even be able to find cards that don't charge a balance transfer fee at all.
And, make sure you know exactly what the interest rate will be once the introductory rate expires. Often, the rate is the same as the rate for purchases, so your entire balance might accrue interest at the same rate. Be sure you understand the difference in interest rates for the balance versus interest rates for purchases. Hopefully, you won’t be using your balance transfer card for purchases, though, since the main purpose is to pay down the balance.
How Do I Qualify for a Balance Transfer Credit Card?
Before you apply for a balance transfer card, ask yourself a few questions:
- How many credit cards do I currently have?
- How many of those cards have balances?
- Can I get a card with a limit high enough to cover those balances?
Before you apply for a balance transfer credit card, take a moment to think about WHY you want to transfer a balance. No one will ask you for the answer to that question on your credit card application, but having an intention for the credit will help you sort out your finances. Never apply for a card without first knowing how you’ll use it.
Will a Balance Transfer Credit Card Affect My Credit Score?
Whether or not you're approved or denied for a balance transfer card, it will absolutely have an impact on your credit score. You’ll see an inquiry on your credit report. But, if you do transfer a balance, your credit score may increase because you've increased your overall credit limits. Why does that matter? Because having a higher overall credit limit among all cards decreases your debt-to-credit ratio. This is otherwise known as your credit utilization.
(This only works if you keep the old card or cards open, though. If you close the card or cards, then your credit utilization remains the same - unless the balance transfer card gives you a higher limit than the total limit of your other card or cards)
If you use the balance transfer card correctly, you can continue to increase your credit score by keeping the utilization rate low on it as well.
The utilization rate is the amount of the balance versus the credit limit. The higher it goes, the lower your score becomes.
How Do I Transfer a Balance?
More than likely, you’ll need to let the card issuer know how much of a balance you want to transfer when you apply for the card. Once you’ve been approved, contact the card issuer and let them know that you want to transfer that balance. They’ll ask for a few details, such as:
- The exact amount of the balance that you want to transfer
- The credit card number and expiration date of the card from which you want to transfer the balance
- The name of the card issuer for the card from which you want to transfer the balance
- That same card issuer’s payment address
The card issuer for your balance transfer credit card will go over the balance transfer fee and introductory rate and length of the introductory period with you. The transfer itself may take a few days (3 - 5 business days, most likely) but you’ll have peace of mind knowing the transfer is taking place.
Once I Transfer a Balance, What Should I Do?
The main purpose of a balance transfer credit card is to pay off debt. So if you get a balance transfer card and don't make a plan to pay the balance off, then you could end up in a cycle in which you have to keep getting new balance transfer credit cards.
Don't let this happen to you. Make a plan to pay that balance off. With any luck, this will be the only balance transfer card you'll need. And if you happen to need a second one after this to complete your payoff, stick to the plan. Here's how to do it:
- Once the balance transfer is complete (fee and all if you were charged one), write down that total balance amount
- Now write down how many months there are in your introductory period
- Divide the balance by the number of months in the introductory period - what's the number you're left with?
- That number should be your target to pay each month - get as close as you can to hitting that every month. If you actually do pay that amount every month, you should be able to pay your card off before the introductory rate expires.
- If you do have a remaining balance, obtain another balance transfer credit card and repeat steps 1-4
A Balance Transfer Card Should Be a Tool, Not a Clutch
The goal here isn't to just keep getting balance transfer cards over and over again. In fact, opening too many credit cards can negatively affect your credit score. Rather, the goal is to use the balance transfer credit card to pay off debt. Get as close as you can. If you need to do this more than once, that's okay. But just don't let this process turn into a crutch that extends the lifeline of your debt instead of helping you eliminate it altogether.
A balance transfer credit card can be a very helpful tool in your financial belt. But, like all credit cards, it’s only helpful if you use it responsibly. Before you apply, be sure that you understand all the terms and conditions, and what you stand to both gain and lose if you obtain a balance transfer credit card.
