Balance transfer

A balance transfer changes where a debt sits and what it costs to carry; it does not make any of it go away. The new card's issuer pays off the old card, the amount plus a transfer fee appears as a balance on the new card, and a promotional rate runs for a fixed number of months, after which the card's regular APR applies to whatever is left. The transfer pays off only when the fee is smaller than the interest it avoids and the balance is gone, or nearly gone, before the promotional period ends. Paid at the same $350 a month, a $6,000 balance costs about $1,500 in interest at 24.99% APR and a $180 fee at 0%.

In a sentence

• "She moved the $6,000 with a balance transfer to a card at 0% for 18 months, paid a $180 fee, and cleared it inside the 18 months."
• "A balance transfer is a lower rate on the same debt, not a smaller debt; the payment still has to be found every month."
• "The balance transfer card is for the old balance only; new purchases on it are usually charged the regular rate, often from the day they are made."

How it works

1. Apply for a card with a promotional rate on transfers, usually 0% for a stated number of months, with a fee stated as a percentage of the amount moved, typically 3% to 5%. The transfer usually has to be requested within a window after the account opens for the promotional rate to apply.
2. Request the transfer. The new issuer pays the old card directly. The amount cannot exceed the new card's credit limit, fee included, so a large balance may move only in part.
3. The fee is added to the balance. $6,000 moved at 3% becomes $6,180 on the new card; nothing is charged separately.
4. Pay it down through the promotional period. A minimum payment is still due every month, and a missed payment can end the promotional rate early. Divide the balance by the months to find the payment that clears it in time.
5. When the period ends, the regular APR applies to what is left, from that day forward.

Payment that clears it in time = balance including the fee ÷ months in the promotional period

An example

A $6,000 card balance at 24.99% APR, with $350 a month available to pay it, three ways. The transfer offer is 0% for 18 months with a 3% fee, and the figures apply the rate to the balance monthly.

At $350 a month, the transfer clears the balance inside the 18 months, four months sooner than the old card, and costs $180 instead of about $1,500. At $250 a month, $1,680 is still owed when the promotional rate ends; the regular APR then applies, and the last eight months cost $149 in interest, so the transfer still comes out well ahead, but only because the leftover was small. The payment that finishes exactly on time is $6,180 divided by 18, about $344 a month.

Why it matters

A balance transfer is the cheapest money most cardholders are ever offered, on terms that assume some of them will misuse it. The interest saved is real: at $350 a month the example saves about $1,320 after the fee. The traps are also real, and each one is a way of paying the regular APR after all: a payment too small to finish inside the period, new purchases on the new card at the full rate, a missed payment that ends the promotion, and the old card, now empty, filling up again so the household carries two balances instead of one. The decision turns on two numbers: whether the fee is less than the interest the old card would charge over the same months, and whether the payment you can actually make clears the balance before the rate returns.

Balance transfer versus debt consolidation

A balance transfer moves a card balance onto another card at a promotional rate for a limited time; debt consolidation replaces several debts with one installment loan at one fixed rate for a fixed term. The transfer is cheaper when the balance can be cleared inside the promotional months, because the fee is usually smaller than a loan's interest; the loan is the steadier choice for a balance too large to clear that fast, because its rate does not expire and its fixed payment ends on a known date. Both are the same debt at a lower price, and both fail the same way, when the cleared cards are used again. See Debt consolidation.

Common questions

Is a balance transfer the same as debt consolidation? A balance transfer is one way of consolidating, since several card balances can be moved onto one card, but the term debt consolidation usually means a new installment loan that pays off the cards. The transfer has a promotional rate that ends; the loan has a fixed rate and a fixed end date.

Does a balance transfer hurt my credit score? The application is a hard inquiry and the new account lowers the average age of your accounts, both small and temporary. Utilization can move either way: the new card adds its limit, which helps, while a balance near that card's limit reads as a card nearly maxed out. Paying the balance down through the period, and keeping the old card open with nothing on it, usually leaves the score higher than before.

What happens when the promotional period ends? On a standard card offer, the regular APR applies to whatever is left from that day forward, and nothing is charged for the months that passed. A deferred-interest offer, common in store financing, is different: if any balance remains at the end, the interest from the whole period is charged at once. Read which kind the offer is before moving anything.

Can I make new purchases on the balance transfer card? Better not. Purchases are usually charged at the card's regular purchase APR, and because a balance is being carried, they may accrue interest from the day they are made rather than getting a grace period. Keep the transfer card for the transfer.

Is the transfer fee worth it? Compare the fee with the interest the old card would charge over the same months at the payment you can make. A 3% fee on $6,000 is $180; the same balance at 24.99% APR costs about $125 in its first month alone, so the fee is recovered in under two months. A 5% fee, $300, is recovered within the first three.

Go deeper

• The Credit card payoff calculator shows how long a credit card balance takes to clear at the payment you make now, what the interest costs, and what to pay each month to be done by a date you choose.
• Debt snowball versus debt avalanche is the order to pay several balances when only some of them can be moved.
• The Debt payoff calculator lists your cards and loans and compares the avalanche and snowball methods, when you are debt-free under each, what the interest costs, and the order the debts fall.