How a Balance Transfer Credit Card Works
Uncover the mechanics of balance transfer credit cards to strategically reduce high-interest debt and improve your finances.
A balance transfer credit card helps manage and reduce high-interest debt by moving outstanding balances from existing accounts onto a new credit card. This new card usually features a special introductory annual percentage rate (APR), often 0%, for a defined period. This allows payments to directly reduce the principal balance, rather than being eroded by accumulating interest charges.
What a Balance Transfer Credit Card Is
A balance transfer credit card consolidates debt by shifting balances from existing credit lines to a single new account. This process often involves a promotional APR, a temporarily reduced interest rate, commonly 0%. This introductory period typically ranges from six to 21 months, providing a substantial timeframe to pay down debt without incurring interest.
The primary benefit is saving money on interest payments, allowing more of each payment to go directly toward the principal debt. While credit card debt is the most common type transferred, some cards may allow transfers from other forms of debt, like personal loans. However, it is generally not possible to transfer balances between credit cards issued by the same financial institution.
Key Factors Before Applying
Before applying for a balance transfer card, assess factors influencing eligibility and financial benefit. Issuers typically require good to excellent credit, often indicated by a FICO score of 670 or higher. Lenders also consider an applicant’s income and debt-to-income ratio.
Most balance transfer cards charge a one-time fee for the transferred amount, typically 3% to 5% of the balance. This fee is generally added to the transferred balance. Understanding the length of the promotional APR period is important, as any remaining balance after this period will revert to the card’s standard, higher APR.
The credit limit on the new card determines how much debt can be transferred. If the limit is lower than the total debt, only a portion can be moved. New purchases made on the balance transfer card during the promotional period may not qualify for the introductory APR and could accrue interest at a higher rate immediately.
The Balance Transfer Process
Initiating a balance transfer typically begins with applying for the new credit card. The application requires personal details, income information, and the account numbers and amounts of debts for transfer. A credit check is performed as part of the approval process.
Once approved, the new card issuer facilitates the transfer by paying off the specified old credit card accounts directly. The transfer can take a few days to a few weeks. Continue making at least minimum payments on old accounts until confirmation that the transfer is complete and balances are zeroed out. This prevents late fees or additional interest charges on the original accounts.
Managing Your Balance Transfer Card
Managing a balance transfer card after debt moves maximizes its benefits. During the promotional APR period, establish a consistent payment strategy, aiming to pay more than the minimum required amount. This accelerates debt reduction before the introductory rate expires.
Avoid making new purchases on the balance transfer card. New spending typically does not qualify for the promotional APR and can begin accruing interest at the card’s standard rate immediately, potentially undermining the transfer’s purpose. Knowing the exact date the promotional period ends is important, as any outstanding balance will then be subject to the card’s regular, higher interest rate.
Plan for any remaining balance after the promotional period. Regularly monitoring monthly statements helps track progress.