How does a balance transfer work?

Credit card debt can be a serious drag on your finances, holding you and your family back from the stress-free life you deserve. There are lots of ways to get out of credit card debt, but for more manageable amounts, a balance transfer can be a good option. 

Balance transfers aren’t a fix-all button, though. If you’re not diligent about creating a strategy first, it could backfire. Done smartly, though — like we’ll show you — it can help you save thousands of dollars while getting out of credit card debt much sooner. 

How does a balance transfer work?

A balance transfer works by shifting your existing credit card debt onto a new “balance transfer credit card.” These cards offer an introductory annual percentage rate (APR) of 0% for several months after you open the card, providing a brief interest-free window to pay down your balance. 

That way, all of the money you send in will go straight towards paying down your balance, allowing you to make much quicker progress in paying it back. Ideally, you’ll be able to pay off your balance entirely before the interest-free window is up, typically after 12 to 21 months. 

Pros and cons of a balance transfer

Often, completing a balance transfer successfully relies just as much on psychology as it does math. Make sure you’re honest about your abilities as you consider this list of benefits and drawbacks. 

Pros

• Save money on interest charges: If you can pay off your balance before the promotional period ends, you can potentially save thousands of dollars in interest. 
• Streamline your payments: If you have balances on several credit cards, transferring them all to one credit card with a single payment can make it easier to manage. 
• Interest-free period can also include purchases: Many balance transfer credit cards also extend the promotional rate to new purchases, too.  
• Can occasionally be used for other types of debts: Balance transfer cards are generally meant for paying down other credit card debt. Although not as common, some issuers allow you to transfer other types of debts, such as personal loans.

Cons

• Requires discipline: In order to pay off your balance before the interest-free period ends, you’ll need to make higher payments voluntarily, which can often be tough to do. 
• Limited time to use it: The interest-free period is a one-time benefit you get with the card. When it’s over, your rate goes up to normal, and you can never get it back again. 
• Requires good credit: You’ll typically need a credit score of 670 or higher to qualify for a balance transfer card, according to Experian.
• Balance transfer fees: Most balance transfer cards charge a fee ranging from 3% to 5% of your balance. That’s $30 to $50 for every $1,000 you transfer over.
• Temptation to spend again: A common pitfall is falling into credit card debt again once your old cards have their full credit limit available to spend. You may need to develop new strategies and habits, such as budgeting and establishing an emergency fund. 
• Limitations among credit card issuers: You generally can’t transfer debt from the same issuer, such as from your old Discover card to a new Discover balance transfer card. Discover also doesn’t let you transfer balances from Capital One cards, either

How to do a balance transfer on a credit card

Holding yourself accountable to pay down your debt can be tough, but at least the actual balance transfer part is easy. Here’s how to do it:

1. Gather information on your current credit card debt: Make a list for each credit card, including the issuer, current balance, and account numbers. Add up the total balance you’re looking to pay off.
2. Create a realistic payoff plan: Divide the total balance by the length of the balance transfer offer you’re interested in. Remember to add balance transfer fees. If you have $10,000 of debt, a 5% balance transfer fee, and an 18-month runway, for example, you’d need to pay $583 per month to pay it off in time. 
3. Apply for a new balance transfer card: Choose a card to apply for, and verify that it can take the types of debt you’re looking to transfer. Apply for the card once you’re ready to do the transfer. 
4. Complete the balance transfer: You may be able to submit the transfer request by entering each credit card account’s details at the same time you complete an application. If not, do it quickly, since most issuers require you to complete the transfer within a few short weeks or months to qualify for the 0% intro offer. 
5. Set up payments on autopay: Set up autopay to send in the amount you calculated earlier, so that you can pay off the balance before the interest-free period is up. This ensures you don’t forget or become distracted. 

What to consider before doing a balance transfer

It’s especially important to pay attention to a few key points when you’re using a balance transfer strategy to help you pay down debt:

• Transfer fees: Balance transfers aren’t free, and the charge will be added to your balance after you complete the transfer. In order to know whether it’s worth it, try using a balance transfer calculator to see if you’d save more in interest than you pay in fees. 
• Credit score: Do you have a credit score of 670 or higher? Also consider whether you’ll be applying for other credit in the near future, such as when purchasing a second home or taking out a business loan.
• Spending habits: Consider how you got into credit card debt and whether those conditions still exist, such as impulse spending or dealing with emergencies. If you haven’t taken steps to address those causes — like learning to budget, or setting up an emergency fund — then a balance transfer can lead you into an even deeper hole. 

Alternatives to a balance transfer

Before you start filling out an application for a balance transfer card, here are a few other tools to consider first:

• Debt consolidation loan: If you can’t pay off your balance within the zero-interest intro period, a personal loan might be better. You’ll pay interest, but it won’t be as much as you would with a credit card.
• Home equity loan: Leverage your equity for ultra-low interest rates and a longer payoff timeline than a balance transfer credit card. 
• Cash-out refinance: If you can qualify for a lower rate on your mortgage, you may be able to take out more than you need and use the extra to pay off your credit card debt.
• Debt snowball/avalanche method: You don’t have to move any debts around at all with these strategies, where you pay down your lowest-balance or highest-rate debt first, respectively. 
• Home equity investment (HEI): Pay off your debt right away and make no payments for up to 30 years, when you’ll repay the funds along with a percentage of your home’s future appreciation (change in value, not total home value). 
• Home equity line of credit (HELOC): Leverage your equity for lower rates and a flexible line of credit, so that when you pay down your balance, you can borrow again as needed. 

Frequently asked questions

Do balance transfers hurt your credit score?

Yes and no. In the short term, you’ll see a small drop in your credit score from opening a new account. It should rise again as you pay down your balance. If you miss payments or rack up a balance on your old cards, however, your credit score could decline further. 

What is the downside of a balance transfer?

Balance transfers do come with fees. If you’re not diligent about paying down your balance and avoiding new credit card debt, you can easily wind up in more credit card debt than you were in before, with consequent impacts on your credit and finances. 

How much will it cost in fees to transfer a $1,000 balance to a credit card?

Balance transfer cards typically charge between 3% and 5% of your balance. If you’re transferring over $1,000, that’s a fee of $30 to $50. 

Can I tap into my home equity to do a balance transfer?

Yes. You can use products like home equity loans, HELOCs, and home equity investments to pay off credit card debt, just the same as a balance transfer card. This is more of a “debt consolidation” strategy than anything, since you don’t get an interest-free period, per se, although the basic idea of turning expensive debt into a cheaper form is the same. 

Final thoughts

Balance transfers are an underestimated tool in eliminating credit card debt, as long as you’re able to pay it off before the interest-free period ends and avoid any further spending temptations. Here are a few final tips that can help you ensure you make the most of the opportunity:

• Find a budgeting style that works for you.
• Keep your old credit cards open if you can use them responsibly.
• Save up an emergency fund so you don’t need to rely on credit cards.
• Close your old credit cards if they charge annual fees, or if you’d be tempted to overuse them again.
• Going forward, aim to pay off your new credit card charges in full each month to prevent a balance from building up.