What is a balance transfer and how does it work?

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Updated on Thursday, April 30, 2020

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A balance transfer is a transaction that allows you to move debt from one credit card to a credit card with a lower interest rate — which can be ideal if you have a large amount of high-interest credit card debt that you’re struggling to pay off.

But while a balance transfer can help save you money and get out of debt faster, beware that if you don’t use it correctly, it can end up costing you more in the long run.

How do balance transfers work?

Simply put, a balance transfer lets you move debt from one or more credit card accounts to a credit card with a lower APR. The goal of doing a balance transfer is to allow you to pay down more of your debt faster as you save money on interest payments.

There are a number of credit cards that offer 0% introductory APRs on balance transfers for a year or longer — meaning, you get a reprieve from interest charges on the transferred amount during that time period.

While the majority of balance transfer credit cards charge fees of 3% to 5% of the amount of each transfer (which is added to the amount transferred), there are cards that don’t charge balance transfer fees.

For example, The Amex EveryDay® Credit Card from American Express comes with an intro APR on balance transfers of 0% for 15 Months, then a regular APR of 12.99%- 23.99% variable will apply, as well as a $0 balance transfer fee.

The Chase Freedom® card, on the other hand, also offers a 0% Intro APR on Balance Transfers for 15 months. After that, an APR of 14.99% to 23.74% variable will apply to any remaining balance. But the card charges a balance transfer fee of 3% when you transfer during the first 60 days of account opening, with a minimum of $5.

A balance transfer fee can make sense if the amount of debt or the APR on the debt you are transferring is high enough where your interest savings is substantial. But it’s always important to do the math first. MagnifyMoney has a handy balance transfer calculator to help you figure out your best strategy.

Read: Best Balance Transfer Credit Cards

How to do a balance transfer

Once you are approved for a credit card that offers balance transfers, you can begin the process of transferring your balance. First, you should gather the necessary information related to the balance you want to transfer, such as the credit card account number, the bank name and address and the amount of your current balance. Next, you can call the bank or credit union of the card to which you want to transfer the balance, and complete the transfer over the phone. Or, log in to your credit card account and complete the transfer online.

Read: How to Complete and Make Payments on a Balance Transfer

Because it may take up to two weeks for the balance to transfer, it’s important to continue making payments on your current credit card until you receive confirmation that the transfer has been completed.
Also know that issuers don’t allow you to do a balance transfer offer between cards from the same issuer. For example, you can’t transfer a balance from one Discover card to another Discover card.

Read: How to do a Balance Transfer with Discover

How to avoid common balance transfer mistakes

When used correctly, balance transfers can help you pay off your balance more quickly while saving money. Here are a few tips you can use to avoid some of the common traps of balance transfers, which include not knowing the terms associated with your balance transfer offer, using your balance transfer card to make new purchases and not having a plan to pay the balance transfer off before the promotional period ends.

1. Know the terms of your balance transfer offer

The total amount you’re allowed to transfer and the amount of time you have to complete the transfer vary depending on the credit card.

For example, the Edward Jones World MasterCard® lets you transfer up to the amount of your approved credit limit. Additionally, in order to take advantage of the card’s introductory APR offer, you must complete your balance transfer within 60 days of opening your account.

With The Amex EveryDay® Credit Card from American Express, however, the maximum amount you are eligible to transfer will be less than your credit limit and will be determined by your creditworthiness and other factors, including your account history with American Express. The minimum amount you can transfer is $100. Like the Edward Jones World MasterCard®, the introductory APR offer only applies to balance transfers made within the first 60 days of account opening.

2. Don’t use your balance transfer card for new purchases

Your main goal with a balance transfer card should be to pay off the entire transferred amount before the promotional period ends, not adding to your debt. This means you should refrain from making any new purchases using your balance transfer card until the balance is paid in full.

Additionally, unless your card also offers a 0% intro APR on purchases, you’ll incur interest charges on any new purchases that you don’t pay off when the billing statement is due, which is what you’re trying to escape from by doing a balance transfer deal.

3. Have an exit strategy

It’s important to establish a plan to pay off your debt before the introductory period ends. Otherwise, you will be subject to interest charges on your remaining balance — which may defeat the purpose of transferring the balance in the first place.

To help ensure you pay off the transferred amount in time, calculate the amount you need to pay each month until the promotional period ends and set up automatic payments. This will also help safeguard you against making a late payment or missing one altogether.

Know that even the best intentions to pay off a transferred balance can be derailed, but if you managed to pay off a large chunk of debt during the balance transfer promotional period, you still did a smart thing.

Having some leftover balance that’s subject to interest isn’t the end of the world, as long as you remain committed to getting that balance down to zero. And it’s not unheard of to apply for a second balance transfer offer to attack any remaining balances.

However, know that you aren’t able to do a balance transfer between cards from the same issuer. For example, you can’t transfer a balance from one Discover card to another Discover card.

Read: 5 Things to Do Once Your Balance Transfer is Complete

Is a balance transfer credit card worth it?

If you have a large amount of high interest debt, a credit card that offers a 0% introductory rate on balance transfers can definitely be worth your while. Even with a balance transfer fee, these cards can help you save thousands of dollars in interest charges — making it easier to get out of debt more quickly.

For example, let’s say you have $10,000 worth of debt at a 20% interest rate that you transfer to a card with a 0% intro APR for 18 months and a 3% balance transfer fee. You’ll end up paying a balance transfer fee of $300 for that transaction, but over the course of the next 18 months, you’ll save around $1,567 in interest charges if you pay off the entire balance in that time, which would require monthly payments of around $573.

Use our payoff calculator to see how long it may take you to pay off your credit card debt.

The information related to The Amex EveryDay® Credit Card from American Express and Chase Freedom®has been independently collected by MagnifyMoney and has not been reviewed or provided by the issuer of this card prior to publication. Terms apply to American Express credit card offers. See americanexpress.com for more information.

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