What Is a Balance Transfer?

  • 8 min read

One of the positive features of having more than one credit card is that there is a possibility that you can transfer the balances of one credit card over to the other card. Many credit card lenders advertise this feature to develop new accounts and will often hand out promotional offers, such as a lower interest rate, to entice people to apply and then transfer a balance. There are pros and cons of doing this, so let’s take a look at them to see if a balance transfer is right for you.

The Pros of a Balance Transfer

The immediate benefit of a balance transfer is that you save money. Whether it is from a promotional interest rate, the savings of a monthly minimum payment, or the long shot of having a portion of your balance forgiven, a balance transfer helps you to better manage your debt.

Balance transfers can help to save money over a long-term period instead of just a short-term period as well. If your current credit card APR is 22% and you can move all of that debt over to a credit card with a 2% promotional APR over 12 months, then you’ll save $110 in interest payments over that period for every $1,000 borrowed.

Balance transfers also give you a better flexibility in payment terms that you may not have otherwise had. Because the interest rates are often much lower, the overall minimum monthly payments are usually much lower as well. This allows you to keep your account balances current on even the leanest of income months.

Maybe the biggest advantage of a balance transfer, however, is the opportunity to pay off your debt more quickly. That can lend to a tremendous boost in your credit rating!

The Cons of a Balance Transfer

The primary detriment to a balance transfer is that you don’t actually pay off any debt when this happens. You’re simply changing the lender who holds the debt. Because it requires 2 credit cards for a balance transfer to happen, one credit card invariably ends up being empty and it can be extremely tempting to incur more debt because of that.

Balance transfer interest rates are often short-term, 12-18 months in most cases, but as little as 6 months sometimes, and then the APR can shoot up to a higher rate than what you were paying on the first credit card!

Balance transfers may be an indication that you’re trying to manage your debt, but for practical purposes in credit scoring, it may immediately lower your score before raising it. More open accounts, having a new account, and having one full credit card and another empty one can all cause a credit score to be several points lower.

Is a Balance Transfer Right For You?

If you have the ability to pay off your debt in the window provided by a balance transfer, then you could end up saving thousands on your repayment terms!

If the APR of your new credit card will be higher than your current one after the balance transfer window, however, and you don’t think you’ll be able to pay down the existing debt in time, then it may not be right for you at this time.

When used wisely, balance transfers can be a powerful tool to help you manage your debt.

A balance transfer allows you to take what you owe on one credit card and then put it onto another card.  Especially if you have a high interest rate on the first credit card, it might sound very enticing to go with a different credit card with a lower interest rate.  While this sounds great in theory, it may not be the best solution for you.

Here are a few things you must consider before doing so:

  1. Rates Expire

One way that credit cards are able to get new clients is by offering a much lower interest rate than the previous credit card.  Still, it is important to know that these rates, while great, will end up expiring.  The initial rate is called a teaser rate (typically somewhere between 0 and 5 percent).  But after a time—often six months to a year—the interest rate will shoot up.  Sometimes, the higher rate will be higher than what you had on your original credit card.  It is important to read the fine print and see how soon the rate will shoot back up and to what level.  A balance transfer still might make sense if you can pay off a lot during the lower interest rate period, taking advantage of it.  Truly consider how long it will take you to repay your balance.  Transferring your balance might put you in worse financial shape than you were pre-transfer.

  1. Balance Transfer Fee

To transfer your balance from one credit card to another, there will generally be an accompanying fee.  The way that this is calculated is by taking a percentage of the total amount that you are transferring.  Nor is there a cap to this total—thus, if you have a very high balance, then the fee might be rather high.  Plus, this fee is paid up front.  Let’s say you carry a $15,000 balance and the fee is three percent.  Right away, you will have to pay $450.  If you have fallen on difficult financial times, you might not have access to $450.  But even if you do, you will still want to calculate exactly how much you will save by the transfer to see if it is even worth it.

  1. Card to Card Philosophy Might Backfire

On its face, switching from card to card might seem like the perfect way to never have to pay interest, so long as you can transfer once that teaser rate expires.  While balance transfers can really help consumers, adopting a philosophy of consistent balance transfers might actually backfire.  In order to continue to transfer, consumers will have to apply for a string of low-interest accounts.  Any time credit is applied for affects the credit score.

This  really raises a red flag for creditors : the consumer is having a difficult time repaying debt.  Therefore, you might not get credit for larger items like a home or a car.  So while you might save a couple hundred dollars by dodging interest, you might end up paying thousands more by getting no credit or high rates for larger items.

What to Know About Credit Card Balance Transfers

Balance transfers may sound like quite an appealing option, especially if you have a lot of debt accumulated on one card and you’re thinking about moving it to a different card where you can pay it off with less interest. In some cases you may even be able to move your balance to a credit card with no interest at all. Doing this can be a great asset for debt consolidation.

If you are in way over your head, however, and you don’t have a strategy which will allow you to pay off your debts in a timely way, then a balance transfer may end up hurting your financial situation rather than easing it. There are certainly reasons why making a balance transfer is such an attractive financial decision, but there are some things to be wary of and take into consideration before making this move.

Positive Aspects of a Balance Transfer

  • Doing a balance transfer often allows you to take advantage of promotional periods where lines of credit can run as low as 0% APR. Under these circumstances, you can save money in interest costs while you get your debts paid off

Negative Aspects of a Balance Transfer

  • Your credit score is likely to go down. When credit rating institutions see that you’ve opened new lines of credit recently, they tend to pin that negatively against your score. However, the impact usually isn’t as drastic as missing a credit card payment.
  • If you accept a new promotional offer, your debt might be at the mercy of that new account. Once the promotional period ends, you may be subject to high interest rates once again  and be restricted with how you can handle the debt for a certain period of time.
  • Balance transfers usually have a one time fee at the very least. This may be 3 or 4% of the money being transferred, but it may be much better than paying 20% APR over the course of the next year.
  • Not everyone qualifies for a balance transfer. Your credit score needs to be at a decent level, usually 680 or higher, in order to make the transfer. If you are struggling with credit, then you may need to look for another solution to your problems.
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Christopher - BSc, MBA

With over two decades of combined Big 5 Banking and Agency experience, Christopher launched Underbanked® to cut through the noise and complexity of financial information. Christopher has an MBA degree from McMaster University and BSc. from Western University in Canada.