Credit Cards » Credit Card Guides » Credit Card Balance Transfer – How It Works And Should You Consider It?
Advertiser Disclosure

This website is an independent, advertising-supported comparison service. The product offers that appear on this site are from companies from which this website receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). This website does not include all card companies or all card offers available in the marketplace. This website may use other proprietary factors to impact card offer listings on the website such as consumer selection or the likelihood of the applicant’s credit approval.

This allows us to maintain a full-time, editorial staff and work with finance experts you know and trust. The compensation we receive from advertisers does not influence the recommendations or advice our editorial team provides in our articles or otherwise impacts any of the editorial content on The Smart Investor. While we work hard to provide accurate and up to date information that we think you will find relevant, The Smart Investor does not and cannot guarantee that any information provided is complete and makes no representations or warranties in connection thereto, nor to the accuracy or applicability thereof.

Learn more about how we review products and read our advertiser disclosure for how we make money. All products are presented without warranty.

Credit Card Balance Transfer – How It Works And Should You Consider It?

A credit card balance transfer lets you consolidate your existing credit card debts into one.  It might be a good way to save on interest plus other benefits. Before you decide to enable a balance transfer, make sure you know the basic- how it works, how much it would cost and its effects on your credit rating:
Balance Transfer - How It Works And Should You Consider It?

Why is a credit card balance transfer fee so important?

A credit card balance transfer lets you consolidate your existing credit card debts into one.  It might be a good way to save on interest plus, there are other benefits attached to it.

All major credit card companies make this feature available to a new credit cardholder. Not only that but some issuers even allow the transfer of other loans into the credit card account. Borrowers can transfer their auto loans, student loans, payday loans, HELOC's, payday loans, small business loans, and even mortgages.

Balance Transfer – How It Works

However, just because the facility is there does not mean it's an automatic option for you.

Before you decide to do it or not, find out all you can about it.  Know how it works, how much it would cost you and if at all, what effects will it have on your credit rating.  Read on as we discuss these issues.

Big Interest Savings

The principle behind balance transfer is very basic.  Transfer your existing high-interest card balances to a new card with a lower interest rate (See how to reduce your card interest rate).  This way, you technically lesser the rate you are supposed to pay.

Effectively, this means that your new card has paid off the balance of your old card or old loan.  You have settled your old debt and started a new one on your new card. You then can begin paying off the balance of the new card.  You would find this supposedly easier to do because of the significantly lowered interest rate.

Interest Savings – Example

As an illustration, let's take a look at this scenario.  Assuming you have a credit card balance of $20,000 with an interest rate of 15% annually.  Using the simplest premise, you would probably pay $476 per month to pay it off in 5 years.  It could be more because some credit card companies compute the minimum required payment differently. If you double your monthly payment, it would take you a little bit over 2 years to wipe off the debt.  In any case, your interest charges would run up to more than $3,400 in total.

If you transfer that balance to a card that offers 0% interest for 15 months, the figures will go down.  (We'll tell you more about the zero percent offer in a moment.)   Suppose that you can continue to pay twice the minimum amount, you'll pay off the debt in 22 months.  The other good thing is, you'll only pay about $266 in interest and save close $2,000!

It really is that simple.

You can already request a balance transfer when you apply for the new card.  You can also do it at a later date.  Many card companies offer introductory balance transfer rates – some of them at zero percent but only for a limited time.  This may be available only for the first 6 to 24 months if you apply within the first 30 days.  Pay particular attention to the balance transfer fees, especially for the zero percent offers.  We'll get to that later.

Balance Transfer Rewards

Theoretically, a balance transfer might provide you with a great opportunity to get rewards.  Many credit card companies offer rewards for usage – the higher the use, the bigger the reward. Card companies count a balance transfer as a usage. Since the transfer usually involves a large amount, they consider it a high-value dollar transaction. This would entitle you to more reward points or bigger instant gifts, depending on the company's scheme.


The bad news is, many credit card companies have excluded balance transfer transactions from rewards earning eligibility. Not all of them, though. As of September 2017 only a few credit card brands are offering rewards inclusion or other bonuses for balance transfer transactions.  These are Discover It and Chase Freedom, to name a few.

You'll find out for sure if the card entitles you to rewards by checking the very fine print on the card agreement.  Do some calculations on the effect of all the offers on your debt.  Just because you can be entitled to rewards does not necessarily mean getting a good deal.  Weigh the value of the rewards against the other charges such as the transfer fee. See if it really adds to your benefit.
balance transfer - how it works

Balance Transfer Fees

After just a few minutes, you may already be thinking that the balance transfer is a good idea. In a lot of cases, it is.  Just remember there is another cost involved.  They call it the balance transfer fee.

A balance transfer fee is a fee imposed by the card company where you are transferring your balance. They will compute based on the amount of debt transferred to the new card. The common transfer charge, as popularly quoted is: “3% or $5, whichever is greater”. This means the card company will bill a straight 3% on the total amount you're transferred.  Also, they will charge it upfront; that is, immediately after shifting your debt to the new card. Feel free to negotiate the balance transfer fee, but take into account your tools are limited in case your credit score is not high enough.

Yes, three percent may not be a big deal by itself but consider its impact to a large balance. For example, for a $10,000 transfer, you'll be paying $300 as a transfer fee.  So instead of saving around $1,500, you are down to $1,300.  Although this may still seem good, it's not as attractive as initially projected.

Some card companies waive the balance transfer fee over a certain period.  Others do not charge any fee at all.  You need to look at each card's offer to find which ones do not collect a transfer fee.

A Balance Transfer May Affect Your Credit Score

What’s The Impact of Balance Transfer on Your Credit?

The good news is, a balance transfer itself will not hurt your credit standing.  Credit scoring companies do not specifically use them to evaluate your creditworthiness.  Card companies do not normally note the transfers on their credit reports.

However, a balance transfer can change your financial profile and may affect your credit score.  There are three possible impacts of the transfer.

1. It can affect your credit utilization

A balance transfer can modify your credit utilization ratio. The credit utilization ratio is a key element of the ‘Amounts Owed' or your total credit card balances. Credit scoring companies score the credit utilization of your card separately. Then they calculate your total utilization in whole.

If you don't cancel the original card, your overall utilization will go down.  On account level, how the new card's utilization level compares against the old card will depend on their credit limits. If the limit is higher, you will have a lower utilization ratio compared to the old one.

2. It can lead to a pattern of overspending

If you use a balance transfer to avoid debt payment or support bad spending habits, it will inevitably hurt your score. Before the recession began in 2007, consumers jumped from 0% credit card to 0% credit card to avoid accrued interests. The practice was just to delay the unavoidable and prevent interest charges from accruing.

You have to realize that you will have to pay anything you charge to your card, sooner or later.  The ‘wise' folks who played the 0% game soon learned the hard way.  The zero percent offers dried up during the crunch and card companies forced them to pay up.  Many of them were unable to pay the balances on their cards especially given the weight of steep financing charges. A big number defaulted on their payments and ruined their credit scores.

3. New credit lowers your score

When you open a new credit card account, your credit score takes a temporary dive.

This may last anywhere from 3 to 6 months.  You should be concerned if you have scheduled a major financial event in the coming months such as a mortgage. Otherwise, you can sleep tight.

Things To Consider Before You Enable A Balance Transfer

Check Your Credit Score First

Cards with zero percent offer usually require an applicant to have a good credit standing before they approve.  See where you stand before making a choice and sending out an application for

Decide how much you want to transfer

You have complete control over the amount you want to transfer.  You can transfer all of the balance or transfer only a portion of it.  Partial transfers are sometimes more beneficial since you can make use of the 0% intro period.

Determine how much you can afford to pay for the 0% and for the old regular rate.To find out the proper transfer amount, compute the monthly payments you can afford. Then multiply that by the number of months covering the introductory period.

Do a careful comparison of credit card offers

Credit card companies try to outdo each other with balance transfer offers at any given time.  Finding the one that would give you the best financial advantage begins with listing the ones you are eligible for.  Then do computations to determine the savings that each one will give.

You have to take into account the card's given interest rate, transfer fee and introductory period, as applicable.  Many make the mistake of focusing only on one feature, usually the length of the introductory period. It is prudent to consider the overall impact of all probable costs.

Make a sensible payoff plan

If you are going to do a balance transfer, you must do it strategically.  Designate your new card for a specific purpose and have an exit strategy beforehand.  Many sites offer an online credit card payoff calculator that can help you make a payment schedule.

You can find out how much you must pay every month to fully pay the balance within the introductory period.  You can also see how much you can save by paying a slightly bigger amount.

Learn how to use a balance transfer to leverage your financial advantage

A balance transfer feature is actually a very good debt management tool. The right card can alleviate interest costs.  Ultimately, you can settle your total debt at the lowest available cost. This applies to the different reasons for availing of a balance transfer.  You may be preparing to purchase a big-ticket item or planning to pay off a revolving balance or consolidate debt.

From another perspective, you may also use balance transfer as a savings mechanism.  If your bank's interest is high enough, you may temporarily park the funds earmarked to pay for the card. This would only be financially beneficial during the card's introductory period. Just be careful that this strategy does not lure you spend more than you should.

The ‘zero percent' offer might go away anytime

The availability of the 0% interest in balance transfer is not a permanent card feature.  You should, therefore, keep in mind that you will probably have to pay regular interest when the introductory period is over.  If you are fortunate to be able to do another transfer down the road at zero percent, good for you.  Hoping that it will always be available might just lead to disappointment.

Fight the temptation to buy thing with your balance transfer card

If you use your new card to make purchases and revolve your credit, you will not have a grace period.  Unless your card has a 0% feature on all purchases, your purchases will accrue interest.  Good financial sense dictates that you should not pay more for anything than what you have to, so be cautious.

Use a different card for your purchases, preferably one that gives you rewards for usage.  You may use your balance transfer card only if you have wiped off your transferred amount.
balance transfer - things to consider