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How Does a Balance Transfer Credit Card Work?

Updated:
Sean Bryant

Man holding credit card with bills

Americans like to spend around the holidays. In 2020 the average debt increased by just over $1,300. Many of those who racked up debt had no plan in place to pay it off (aside from making minimum payments). Back when the 2019 holiday shopping season rolled around, 1 in 6 shoppers that racked up that debt in 2018 were still paying it off.

If you’re struggling to get out from under the debt burden, then a balance transfer card could be the solution. You’ll pay off your debt sooner and potentially save thousands of dollars.

Here’s what you need to know about how a balance transfer card works.

Understand Your Credit

Better credit gets you better terms; this is true with the vast majority of loans. If you’re planning to transfer your debt from one card to another, understand that the higher your credit score, the higher quality of cards you will qualify for. That means longer introductory 0% APR periods and possibly a lower balance transfer fee.

Find the Card with the Best Terms

Credit card issuers will cycle through incentives while vying with each other for your business. Most offer 0% interest on transfers for the first six to 24 months. But don’t automatically assume the longer period is better. Occasionally, the longer term might also come with higher fees to transfer; these fees range from 0% to 5% of the amount transferred. When choosing between cards, compare all of the features and fees to find one what’s best for you.

If there are no cards that fit your needs, you can always wait a month or two until the next promotion begin. In the meantime, your credit score should go up, your total debt should go down, and you should be in a better position to wipe out your debt.

Pay No Interest Up To 18 Months with These Credit Cards

Understand the Fees

Suppose you’re transferring $10,000 and the credit card has a 5% balance transfer fee. A $500 fee will be added to the amount that you owe right after the transfer is completed.

Most major credit cards won’t require you to pay back-interest if the balance isn’t paid off by the end of the promotional period. However, the standard interest rate that kicks in on the remaining balance may be higher than what you were paying with the old card. To help avoid this problem do your best to pay off your debt by the end of the promotional period.

Additionally, any new purchases made on the card, after the initial transfer, often won’t be eligible for the 0% offer.

Transferring Debt to the New Card

Despite our own desires, transfers aren’t going to be instantaneous. You still have to apply for the card, get approved, and go through the transfer process. If a payment comes due in the middle of that process, you still have to make a payment or risk late fees and penalties.

Balance transfer cards were designed to transfer high interest balances. You may be asked if you want to transfer a balance during the application process. Once the new card is open and approved, if you want to transfer a balance you can simply call the card issuer and get the details how the next steps.

After the transfer is completed, make sure you keep the oldest credit card account open! Part of your credit score is determined by the average age of your credit portfolio. If you close a card that you’ve had for a long period of time, you shorten your credit history. This will end up lowering your credit score.

Pay it Off Quickly

Before the transfer goes through, have a plan in place to make substantial payments while you’re still in the introductory 0% interest period. Ideally you will be able to wipe out the entire debt during this period, but sometimes it’s not entirely possible. By paying down as much of the balance as you can, you will diminish the amount you pay in interest after the promotional period ends.

Be aware that when the promotional period is over, offers for another 0% balance transfer cards may be pretty scarce. Opening these accounts, using them for a short period of time, and then trying again will create a red flag for card issuers. You might be able to do it a couple times in a row, but don’t count on it.

Click here for Insider Strategies to Pay Off Your Credit Card Debt

The Bottom Line

When you transfer a balance owed on a credit card, you’re not paying off any debt. Instead, you’re eliminating a high interest debt and replacing it with another debt with a lower interest rate. This isn’t designed to lower your monthly bills; in fact, your monthly payments should go up so that you can quickly get back to enjoying a debt free lifestyle.

Finding the right balance transfer card can help you get out of debt much faster since you’re temporarily eliminating interest. However, it’s important to have a clearly defined plan on how you will maximize the use of that promotional period. This will allow you to receive the greatest value when transferring debt to a new card.

First published , last updated

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ABOUT THE AUTHOR

Sean Bryant

Sean Bryant is a Denver-based freelance writer specializing in travel, credit cards and personal finance. With nearly 10 years of writing experience ,his work has appeared in many of the industries top publications. He holds a bachelor of arts degree in economics. He also runs OneSmartDollar.com. When not working, Sean enjoys spending time with his wife, daughter and dog Charlie and can frequently be found on his bike or snowboard.

Learn more about Sean Bryant

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.

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