Understanding Credit Card Balance Transfers

One way people seek to address their debt is by transferring balances to a new credit card. They might be consolidating multiple cards into one debt, or combining different kinds of debts under a new revolving credit card account.

This kind of strategy isn’t for everyone, and like any debt repayment strategy, has upsides and downsides.

If you’re looking into transferring balances to a credit card, you have a lot to consider, starting with how balance transfers work.

How Balance Transfers Work

Whether you get a new credit card or use one of your existing accounts, you can request a balance transfer to move debt from one card to another. In many cases, your creditor will issue checks that you can write to repay the debt you want to transfer. These checks are drawn against the card you are transferring balances to.

Many credit cards are specifically designed to be used for balance transfers, with special lower introductory rates for transferred balances. Because of the fees and costs associated with balance transfers, some of these balance transfer cards will typically be the best choice for those opting to transfer a balance.

Why transfer balances?

• Simplify payments. By combining multiple balances on a single credit card, you make it easier to repay those debts. Instead of several cards with different payment due dates and different minimum monthly payments, you now only have one payment to make. And if you get a balance transfer from your financial institution, you could even set up automatic payments from your checking account, simplifying the whole process even further.
• Consolidate debts. You could merge a small unsecured loan, medical debt, or other kind of debt under a single credit card balance. If the new card’s interest rate is lower than the average of the combined debts, you’ll speed up the debt repayment process.
• Access rewards. Some credit cards get you extra rewards and benefits when you use them. Every dollar you repay through such a card earns you “points” toward the reward. So if you consolidate multiple debts onto a rewards card, you increase the rewards you get.
• Save money. If your interest rates are high or you are incurring fees, regularly, transferring balances could save you money. If your new consolidated payment is easier to manage, you might save money on late fees, and a lower introductory rate will save you money while it lasts.
• Free up capacity. You might have a card you need to use for a particular reason, but not enough available credit on the account. By transferring that balance to another card, you can free up the capacity you need to use your desired card.

Why you should exercise caution before transferring balances

As it turns out, every one of the reasons listed above could turn out to be reasons NOT to transfer balances. Transferring balances comes with costs and risks that must be considered, lest you make your overall financial situation worse.

• Free up capacity. The scenario we discussed above is one of the worst reasons to transfer balances. If your preferred card is maxed out or nearly maxed out, that is a sign of a debt problem. Transferring balances doesn’t solve that problem. Even though you get the benefit of using the credit card you prefer, you’ve increased your overall debt load and set yourself up for potential financial disaster.
• You’re not repaying the debt. Any balance you transfer isn’t repaid; it’s only moved. Moving debt from one account to another can be useful, but your top priority should be to pay off the debt, not just shuffle it around. That’s why transferring balances should only be a strategy to make it easier to pay off your existing debts, not a way to free up capacity to take on additional debts.
• It’s not free. Most balance transfer cards will carry a 3-5% balance transfer fee. The percentage is calculated based on the amount transferred. So if you move $10,000 to a new card, it could cost you $500 up front. You have to do the math to know if the amount you’re saving is worth the extra you’re going to have to come up with at the start. (Use an online credit card payoff calculator to figure out how much you’ll pay with your new interest rate).
• The transfer rate will expire. Balance transfer cards come with introductory rates, sometimes as low as 0%. That can be great, but these rates will expire on a set schedule or under certain circumstances, such as if you’re late or miss a payment. Once that rate expires, a new, higher rate will kick in. Sometimes that rate can be much higher, so you must be certain you will be able to make your payments and pay off the transferred balance before the introductory rate expires.
• New purchase rate will be higher. It’s generally a bad idea to use a balance transfer card to make new retail purchases. The rate for purchases will not be the same as the lower rate for the transferred balance, and will likely be much higher. The federal Credit Card Accountability and Responsibility and Disclosure Act (CARD Act) requires that card issuers allocate payments in excess of the minimum payment to the balance with the highest interest rate. To assure that a new purchase is paid in full and does not accrue any interest, you will need to make a payment that totals the amount of your purchase plus the minimum amount due. It a good idea to call your issuer to make sure you’re doing the math right because credit card minimum payment formulas vary.  It’s best to only use a balance transfer card for balance transfers, and never use it to make purchases.
• You must have good credit. It isn’t a given that you will be granted a balance transfer. This will involve a credit check, and if your credit isn’t good enough, the bank will think twice before extending you this service. Having a good credit score indicates to the bank that you understand some of the considerations we’ve discussed above and that you will be able to make your consolidated debt payment after the transfer is granted.

It’s not necessarily a bad idea to transfer balances, but it’s often a way to shuffle debts to stay afloat a little while longer when what you should really do is come up with a strategy to eliminate your debts entirely.

We can help. With personal debt counseling, we can help you create a budget and a payment plan that will help you pay down your debts over time without having to take on a new loan. And with services like debt management plans, you can also get the advantages of consolidating monthly payments.

Consider all your options before taking on a new debt in the form of a balance transfer. If you do opt to transfer balances, make sure you understand all of the costs and terms and have a plan to be debt free.

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