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What is a balance transfer and how does it work?

Yahoo Personal Finance· Getty Images
Kendall Little
·Senior writer, credit cards
Updated 11 min read

If you owe more than you’d like on your credit cards, you’re in good company. Anything from a one-time unexpected expense to making only minimum payments for a few months can leave you with a mounting credit card balance.

In fact, credit card debt is at an all-time high: Credit card balances throughout the U.S. crossed $1 trillion in 2023, for the first time since the Federal Reserve began reporting the data.

And given the high annual percentage rates (APRs) credit cards charge, it can be difficult to get out from under your debt once you’ve started accruing interest.

But credit card debt doesn’t have to be insurmountable. For some cardholders, a balance transfer — alongside a solid payoff plan — can be the right tool to eliminate debt.

A balance transfer is the process of moving existing debt from one account to another to minimize interest with a balance transfer credit card.

These credit cards offer a lower interest rate over a limited time period: often 0% APR that can last for longer than a year.

Once your balance is transferred (generally within a specific period of time and for a fee), you can begin paying down your principal balance. When the intro period ends, your new card’s issuer will begin charging interest on any remaining balance at the regular ongoing APR.

Balance transfers work by eliminating costly interest charges that can make it difficult to pay down existing credit card debt — at least for a while.

Here’s the process:

  • Open a new credit card with an introductory 0% interest rate.

  • Transfer the balance from your existing card to the new card.

  • Be prepared to pay a balance transfer fee. Some lenders may waive the fee, but it’s typically around 3% to 5%.

  • Start making payments to reduce your balance within the introductory period — ideally paying down the new card balance before the intro period ends.

One important thing to note is you should make your transfer quickly, since the countdown on your intro period begins once you’re approved for the new card. If you have 18 months of zero interest, for example, but don’t transfer your balance until four months after opening your new card, you’ll reduce your payoff time to just 14 months.

It may seem counterintuitive to open a new account when you’re trying to minimize credit card debt you already have, but having a plan can help you avoid ending up where you started.

Balance transfers work best when you can pay down all or most of your existing balance before you start accruing interest again, even if you can’t pay it off in full. Using a balance transfer card can potentially save you thousands of dollars in credit card interest — and shave years off your repayment period.

For example, say you currently have $5,000 in credit card debt on a card with a 25% APR. If you made only the minimum payments toward that debt, you could pay over $9,000 in added interest before paying it off in full after 24 years.

Now, say you qualify for a new credit card with an 18-month intro 0% APR on balance transfers and 3% balance transfer fee. After the intro period ends, this new card charges the same ongoing 25% variable APR.

If you can afford to pay $287 per month toward your debt, you could pay down the balance in full within 18 months and not pay a dime in added interest.

But even if you can’t pay your balance in full before the regular interest rate kicks in, you’ll still save with the balance transfer.

By paying $150 per month, for example, you’ll reduce your overall balance from $5,000 to $2,450 over the 18-month intro period. Once the 25% APR kicks in, continuing to pay $150 per month means you’ll pay down your balance in full after 21 additional months and just under $600 in added interest.

Choosing the right credit card to complete your balance transfer can make a big difference in your debt payoff journey and longer-term personal finances. Here are a few key details to know.

Choose a balance transfer credit card with a 0% APR introductory period that works for you, your budget, and your existing debt balance.

First, always make sure your new card specifies that the promotional 0% APR it offers applies to balance transfers — not just new purchases made with the card.

Balance transfer intro periods typically range between 12, 15, or 18 months, though the longest offers we’ve found last up to 21 months. While you might be inclined to go straight for the longest possible introductory period, that may not necessarily be best for your situation and long-term goals.

Say you have $200 per month to pay toward your debt, and your balance is $2,000. With a 0% APR, you could pay off your balance in full in just 10 months. In this case, you could get more value from a balance transfer card with a shorter intro period but other benefits and perks.

On the other hand, maybe you can only dedicate $100 per month toward that same $2,000 debt balance. With no interest, you’ll need 20 months to pay your balance in full — so you’ll get the most value from a card with a much longer intro period.

There are a few different fees to be aware of before you open a balance transfer card.

First, look for a balance transfer card with no annual fee. A $0 annual fee is common among this card type anyway, and if you’re already paying down an existing balance, any money you can save on added fees is a boost toward your debt payoff.

Balance transfer fees may be the biggest fee to look out for. They’re usually expressed as a percentage of the balance you have to transfer, alongside a minimum dollar amount (e.g. 3% or $5, whichever is higher).

Some creditors forgo balance transfer fees altogether — and it’s generally good practice to avoid this fee if you can. But you may not want to choose a balance transfer card based on the fee alone.

Is a balance transfer fee worth it?

Say you’re deciding between two different balance transfer options with a $5,000 balance to pay down. One card has a 12-month introductory 0% APR period with no balance transfer fee, while the other has an 18-month intro period with a 3% fee.

You would need to make monthly payments of at least $416 using the no-fee option to pay off your entire balance before the 12-month intro period ends. But the second option would require only $286 per month — including the balance transfer fee — to wipe out your debt within the 18-month intro period.

If you can afford to make the larger payments, you can save money with no balance transfer fee. But if your monthly budget is limited, an extra six months without interest may be much more valuable than avoiding a 3% fee.

The credit limit you’re approved for often depends on your credit history and other factors in your card application.

This limit will determine how much existing debt you’ll be able to transfer to your new card. When you make the transfer, your credit card issuer will reduce your credit limit by that amount — including any balance transfer fees that apply.

For example, say you’re approved for a credit line of $5,000 but your existing debt totals $7,000. In this case, you’d only be able to transfer a portion of your balance to the new card.

There’s another aspect of this to watch out for that can affect your credit, too: credit utilization. Maybe you’re approved for a $5,000 credit limit on your new balance transfer card and have $5,000 in debt to pay off.

If you transfer that full amount, you’ll utilize 100% of your available credit. Until you pay down a significant amount, this high credit utilization may negatively impact your credit score.

Anytime you open a new credit card account, you should consider the card’s long-term use within your overall financial plan. In the short-term a balance transfer card can be most effective for paying down debt, but that doesn’t mean you won’t also use it after your balance is gone.

Cards with a competitive 0% balance transfer intro APR may have great ongoing rewards and benefits, too. Many cash back credit cards, for example, can be used as balance transfer cards.

However, the tradeoff for great ongoing benefits is a potentially shorter intro APR than you could find on other cards. If you have a very large balance and need the extra time to pay down your debt in full, you may want to prioritize other factors over ongoing benefits. But if you know you can pay down your balance within 12 or 15 months, consider how your balance transfer credit card’s rewards and benefits fit with your regular spending before you apply.

Here are a few credit cards we believe are among the best for balance transfers today:

Each of the cards below offers a 0% introductory APR for 21 months on balance transfers. After the introductory period ends, you’ll pay interest on any remaining balances at the card’s ongoing APR. You may also be required to pay a balance transfer fee.

These cards have slightly shorter promotional periods, ranging from 15 to 18 months interest-free for balance transfers. However, they also have ongoing benefits and rewards that make them good options for long-term value.

Once you pay off your debt balance, you can use these cards to earn cash back on your everyday spending. Just make sure to practice good credit habits and spend only what you can afford to pay down when your bill is due — so you don’t get caught up in another debt cycle later on.

Balance transfers aren’t the only way to pay down your existing debt. Personal loans are another debt management tool you can use to pay down your balances while minimizing interest.

There are a few big differences to consider, though:

The line of credit you qualify for on a new balance transfer credit card can be limiting if you have a very large balance. A personal loan may offer more flexibility for higher amounts of debt consolidation.

Personal loans also make a good choice if you’re looking to consolidate multiple types of debt. Balance transfers are best for moving debt balances from one credit card account to another — while personal loans may be useful for credit cards, auto loans, private student loans, and more.

However, you can potentially save a lot more on interest with a balance transfer. Though you may be able to qualify for a lower interest rate than regular credit card variable APRs, personal loans don’t often carry the same low introductory APRs as balance transfer credit cards.

As an example, let’s say you have a $5,000 credit card balance and are considering moving it to either a balance transfer card with 0% APR for 18 months or a personal loan that you’ve prequalified for with an 8% APR and five-year term. The balance transfer fee and personal loan origination fees are both 3%.

With the balance transfer card, you can pay your balance in full over the 18-month period by making $287 monthly payments — and accrue no added interest. With the personal loan, you’ll pay your balance off through the five-year term with monthly payments of around $100 and pay just over $1,000 in added interest.

A balance transfer can be a great way to manage high interest and pay off your debt.

The most important thing to remember is that you should have a plan for paying down your balance before you make your balance transfer.

Read all of the account information available to ensure the intro period length, potential fees, and ongoing benefits work for your individual situation. If you’re only making the minimum monthly payment toward your debt now, evaluate your budget and spending for a way to increase the amount you’re paying each month. The more you can dedicate toward your monthly payments, the faster you’ll pay down your principal and reduce the overall cost of your debt.

And don’t forget: You can get the most value from your new credit card by only using it to pay down debt. If you make new purchases through the intro period, you’ll only be adding to the overall balance you have to pay off before your regular rate kicks in.

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