Many people wonder how balance transfers work and if they can negatively affect your credit score. Balance transfers are a powerful tool that can help reduce high-interest debt payments.
With credit card interest rates at an all-time high, currently averaging around 27.89%, carrying a balance on high-interest cards is increasingly expensive. In fact, Americans paid more than $133 billion in credit card interest and fees last year alone, with average annual costs around $120 billion.
A balance transfer to a credit card with low or 0% interest could save you hundreds or even thousands of dollars, especially when used strategically.
Let’s review how balance transfers work and how they can impact your credit score.
How Do Balance Transfers Work?
Balance transfers are primarily for people who want to save money by reducing their interest payments on existing credit card debt. You save money by transferring high-interest credit card debt to another credit card that has a lower interest rate.
A typical credit card has transfer fees associated with transferring a balance. But some credit cards offer introductory rates that allow you to temporarily circumvent transfer fees and interest.
In order to take advantage of a balance transfer credit card, you’ll need to adhere to the issuer’s cardholder agreement and understand the fine print.
However, it’s essential to understand that applying for a balance transfer credit card can result in a hard inquiry, which may temporarily negatively affect your credit score.
To help you get started, here are the step-by-step instructions on how balance transfers work and what you should consider:
- Evaluate Your Current Debt: Assess your debt situation to decide if a balance transfer is right for you. Calculate how much interest you’re currently paying, and determine whether transferring this debt could save you money in the long run.
- Compare Balance Transfer Offers: Use comparison tools or websites to find the best balance transfer cards available. Look for cards with 0% APR introductory periods, no annual fees, and low or no balance transfer fees.
- Apply for a Balance Transfer Card: The application process generally requires a credit check, which triggers a hard inquiry. Your credit score, income, and debt levels can influence your eligibility and the interest rates offered.
- Complete the Transfer: Once approved, follow your new credit card issuer’s instructions to transfer your balance. Typically, the balance can be moved over within a week or two, but this process may take up to six weeks. Be sure to confirm the balance is fully transferred before making payments on the new card.
- Monitor Payments: Make timely payments on the new card and keep track of the introductory APR period. Paying down the balance aggressively during this period can save you significantly in interest costs.
Balance Transfer Credit Card Pros and Cons
Balance transfers are a valuable tool for managing credit card debt, but they come with both benefits and potential risks. Weighing the pros and cons can help you make an informed decision that will ultimately benefit your financial situation.
Benefits of Balance Transfers
- Lower Interest Rates: By transferring high-interest debt to a 0% or low-interest balance transfer card, you can save substantial money over time on interest.
- Faster Debt Repayment: With reduced or eliminated interest, your payments go directly toward paying down the principal balance, helping you clear debt faster. Use the savings from lower interest to make larger payments each month.
- Simplified Payments: Consolidating multiple balances into one manageable monthly payment can simplify your finances and reduce the risk of missed payments. This can make it easier to budget and manage your debt.
- Potential for Rewards and Bonuses: Some balance transfer cards come with extra perks, such as cashback rewards, points, or travel bonuses, which can make the card useful even after you pay off your transferred debt.
Potential Risks of Balance Transfers
- Balance Transfer Fees: Many cards charge a balance transfer fee, typically 3% to5% of the transferred amount. Calculate whether the savings from a lower interest rate outweigh these fees before proceeding.
- Risk of Accruing More Debt: After transferring the balance, avoid the temptation to use your old credit card for new purchases. Focus on paying off the transferred debt before using the card again.
- Introductory APR Expiration: If you haven’t paid off your balance by the end of the promotional period, the remaining balance could be subject to the regular APR, which could be higher than the rate on your old card. Having a repayment plan in place is crucial to avoid this risk.
- Potential Credit Score Impact: Opening a new line of credit results in a hard inquiry, which can temporarily cause a small negative impact on your credit score. Additionally, a new credit card can lower your average account age, which could slightly impact your score. However, as you pay down the balance, improved credit utilization can positively affect your score over time.
Good Credit Cards for Balance Transfers
Generally speaking, if you qualify based on your credit score, some of the best credit cards for balance transfers have the following criteria:
- Intro (Purchases): 0% Intro Annual Percentage Rate (APR) on Purchases (ex. for 12 months)
- Intro (Transfers): 0% Intro Annual Percentage Rate (APR) on Balance Transfers (ex. for 12 months)
- Annual Fee: $0
What does this mean for you? If you have a credit card balance with a high APR, you can transfer your balance to a card with no fee, and you have 12 interest-free months to pay your balance down.
Explore good balance transfer cards here, or you can sign up for Money Sensei® to get custom balance transfer credit card recommendations based on your unique financial profile.
Pro Tip for Choosing a Good Balance Transfer Credit Card:
Find a balance transfer card with additional benefits and perks, like one that offers rewards, cash back, travel bonuses, discounts, or signing bonuses. That way, you’re getting an extra benefit from opening a new line of credit, and the credit card has some additional use and value to you after you pay off your credit card debt.
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Important: Make sure you pay off your credit card debt before the introductory period ends! If you don’t pay off your balance by the end of the intro period, you’ll pay interest on the entire starting balance — regardless of how much you paid down your balance.
Is a Balance Transfer Worth It?
A balance transfer can be a smart move if you have high-interest debt and can qualify for a 0% or low-interest APR offer. Additionally, if you are juggling balances across multiple cards, a balance transfer can also serve as a consolidation strategy, streamlining payments and reducing the stress of managing several monthly due dates.
Consider these factors before pursuing a balance transfer:
- The balance transfer fee (typically 3-5%) and whether the savings from reduced interest will outweigh this cost.
- Good credit is often required to access the best balance transfer offers.
- Financial discipline is essential to pay off the transferred balance within the introductory APR period to avoid high interest charges.
With strategic planning, a balance transfer can be a valuable step toward saving money and paying down debt faster.
Frequently Asked Questions
Fully understanding balance transfers is essential before getting started, especially with factors like fees and credit score impacts. Here are answers to frequently asked questions about credit card balance transfers.
Can I keep transferring credit card balances?
Yes, you can. Keep in mind that applying for a new credit card, and opening a new credit card, can have negative impacts on your credit, or even affect your ability to open a new credit card.
💡 Watch: How to Avoid Paying Interest on Credit Cards | Interest Hack
For example, if you want to get approved for a Chase credit card, they have a policy that says you can’t have opened five or more personal credit cards in the previous 24 months.
Each credit card you apply for can also result in a “hard inquiry” on your credit report. A hard inquiry often causes a small negative impact on your credit score. FICO® Scores only include hard credit inquiries from the last 12 months in your score, but they could remain on your credit report for up to two years.
Do balance transfers hurt your credit score?
A balance transfer could negatively impact your credit score due to the act of opening a new line of credit. But transferring your credit card debt to a new balance transfer credit card is not likely to harshly affect your credit. By paying off your debt can help your credit score, as your credit utilization ratio will improve, helping your available credit to go back up to your starting credit limit.
⭐️ Related: How Does a Balance Transfer Affect Your Credit?
Bottom Line
Balance transfers are a useful financial tool for managing high-interest credit card debt when done strategically. By understanding how balance transfers work and evaluating both the benefits and risks, you can determine if this option is right for you. Remember to keep a repayment plan and monitor the introductory APR period closely to maximize the benefits of your balance transfer.
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- Financial Coaching: Get personalized advice to help reach your debt repayment goals.
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- Money Sensei® Technology: Use AI to help discover personalized balance transfer credit card recommendations based on your unique situation.
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