How Balance Transfers Work and Why Should You Transfer A Balance


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How do balance transfers work?Using a credit card balance transfer can be a good way—for some—to pay off debt more quickly and save hundreds of dollars on interest. If you qualify for a balance transfer credit card and are a good candidate to use a balance transfer, you should understand how balance transfers work before you commit.

What is a Balance Transfer?

Before you decide whether or not a balance transfer is the right move for you, it’s important to understand exactly what a balance transfer is and is not. Let’s start with what it is not. A balance transfer is not debt forgiveness, a personal loan, or repayment. In other words, you aren’t getting rid of your debt, you’re simply transferring it to another location. The reason you’d want to do that will be covered later on.

Now that you understand what a balance transfer isn’t, let’s explain exactly what it is and how it will help you save money and headspace. A balance transfer is a financial transaction that takes your debt balance owed to one party and transfers it over to another party, so the debt balance is now owed to the new lender. Let’s use an example to clarify:

  • Average Joe owes $5,000 on his BP gas Credit Card, which is issued by Synchrony and carries a high interest rate of 27.24%.
  • Joe transfers his $5,000 debt that he owed to Synchrony over to the Discover It® Balance Transfer.
  • Discover pays down the $5,000 debt to Synchrony.
  • Now, Joe’s debt of $5,000 is owed to Discover. Instead of paying the 27.24% interest rate to Synchrony, though, Joe will be making his monthly payments to Discover at a much lower rate, and after an 18-month grace period.

So, it’s just changing the destination of your debt essentially, but it can save you lots of money if you play your cards right (pun intended).

Reasons to transfer your credit card balances

Save money on interest

If you can qualify for a 0 percent APR balance transfer credit card, you’ll likely save money you’re currently paying in interest (even after paying a balance transfer fee on the new card).

For example, let’s say you’re carrying a $3,500 balance on a card with a 17 percent APR and you’re not paying any more than the minimum amount, $95, due each month. At this pace, and assuming you stop using the card, it will take you 53 months to pay off the balance. With interest, you’ll end up paying almost $5,000 in total. (You can use our debt payoff calculator to see when your credit card balance would be paid off at its current APR and minimum payment.)

Let’s say you qualify for the best-case scenario: a card with an 18-month 0 percent APR on balance transfers and no transfer fee. You’d have to pay about $195 a month in order to pay off the balance before the promotional APR expires. But that’s only $100 more than your current minimum payment. Not only would you pay the balance off faster, you’d also save hundreds on interest payments.

How much could you save? Balance transfer savings calculator.

Consolidate multiple balances on one card

In addition to saving money on interest, having one card instead of several means fewer bills to keep track of. If you have trouble remembering your cards’ different due dates or have ever been penalized for late payments, the consolidation benefit of a balance transfer could help.

In some cases, you may be able to consolidate several balances onto one card, allowing you to close out the old accounts and simplify your finances.

Will you qualify for a balance transfer credit card?

A balance transfer can help you pay off more quickly, but in order to qualify you can’t be too deep in debt. To get approved for a balance transfer credit card, you’ll need to have:

  • Good credit (this usually means a minimum FICO score of 680, but there may be exceptions)
  • No more than two hard credit inquiries in the last 6 months
  • Available credit (in other words, your current cards can’t be maxed out!)

Related: Is a balance transfer right for you?

How balance transfers work

After you have compared balance transfer credit cards and selected the best card for your situation, you’ll apply for the credit card. It’s easiest to do this online, but you could also call the bank’s 800 number or return a paper application you received in the mail. Here, we’ll assume you’re applying online.

Credit card applications are fairly quick and straightforward. They typically ask for:

  • Contact information
  • Social Security number and date of birth (for the credit check)
  • Employer and annual income
  • Monthly housing payment and length at residence
  • Creditor names and account numbers for balances you want to transfer

Information you’ll need to request a balance transfer

In this last section of the credit card application you will need to provide information about the credit accounts from which you want to transfer the balance. At a minimum you’ll need to know:

  • The creditor name
  • Your account number
  • The transfer amount

The application may also ask for your payment address and/or customer service phone number, but these might be optional.

What if I don’t have this information when I apply?

You may decide that you want to apply for a balance transfer credit card, but you don’t have all of the required information about the accounts you want to transfer. You usually have a couple of options:

  • Some banks let you save your application and return later
  • Otherwise, you may be able to request the balance transfer after you apply

In the second case, read the fine print on your cards’ application. Most cards will give you a window of time (for example, 60 days) to transfer balances at the promotional APR. You can do this at any time within the transfer period by calling the card’s customer service number.

What happens after you submit your application

After you apply for the new credit card and request a balance transfer, the issuing bank will process your application. It will:

  • Approve or decline your application
  • Assign you a credit limit
  • Automatically pay off some or all of the accounts on your balance transfer requests

If your application is declined, nothing will happen to the accounts for which you requested a balance transfer.

If your application is approved, your balance transfer requests are subject to the credit limit the bank grants you. It’s important to note that your transfer requests may be granted in whole or in part. For example, if you request to transfer a $5,000 balance but only receive a $3,000 credit limit on the new card, the new bank will transfer $3,000 and $2,000 will remain on your old account.

After you apply, you will receive both immediate electronic communication and a letter in the mail following up on the banks’ decision.

In the event that all of your transfer requests are processed, the new bank will pay off your existing credit accounts. You will then receive a statement from the new bank featuring your new payment and due date.

Important! You may not be done with your old accounts

Even if you are approved for the new balance transfer credit card and the bank grants all of your transfer requests, you may be responsible for residual interest on your old cards. Most likely, you’ll receive one more statement that you’ll need to pay. Don’t forget about this! Missing this payment — even if it’s only for a few dollars — can smear your credit just like any other missed payment.

Getting started with a balance transfer

Choose a card

If a balance transfer is right for you, shop around for the best balance transfer offer. Keep in mind that banks typically do NOT allow transfers between their own accounts, so you’ll have to look at offers from banks you don’t already have a card with.

Two cards to consider for balance transfers are:

When you get approved, don’t dawdle

If you can’t request your transfer when you apply, most cards give only a finite 30- to 60-day period after opening the new account to make a transfer that qualifies for the promotional APR.

Continue to pay your old account(s)

Balance transfers can take days or weeks to process, so don’t assume you can skip the next payment on your old card. Even after a transfer clears, you may receive a statement from the old card for residual interest. Keep checking both accounts until you see that the transfer has been processed and you receive a $0 statement from the old account(s).

After the balance transfer

Cut up your old credit card so you can’t use it, but think twice before you close the account right away. Doing so will have a negative impact on your credit score by increasing your debt-to-credit ratio. Weigh the pros and cons of closing the old account or keeping it open. (Is there any chance you’ll order a new card on the account and overspend? If so, close it. If not, leave it open.)

Do NOT max out the card you just cleared!

This eliminates the benefits of the balance transfer and saddles you with even more debt than you started with. If you continue to struggle with making your debt payments and paying for daily expenses in cash, it’s time to figure out why you’re in debt and examine more options for getting out of debt for good.

Summary

Balance transfers, if used wisely, can be a great tool to use to get out of debt and save money on interest payments. But they also carry risks, ones that might leave you worse off than when you started.

So is a balance transfer the right move for you? Tell us in the comments how a balance transfer helped you reduce debt, or what you did instead when you realized it wasn’t your best option.

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