Balance Transfer Cards: How They Work and When They Help

If you’re paying high interest on credit card debt, a balance transfer offer can look like a way to hit pause. Used carefully, it can save real money. Used carelessly, it can leave you with a new card, a fee and the same debt. Here’s how balance transfers work and how to avoid the common traps.

How a balance transfer works

You open a new card, or use an existing one, and move a balance from another card onto it. The new card pays off the old one, and you now owe the new card instead. According to the CFPB, many card companies offer a 0% or low promotional rate to attract transfers, but the rate lasts only for a limited time.

What it really costs

The balance transfer fee

The CFPB explains that the fee is usually a percentage of the amount transferred or a fixed amount, whichever is more, and that it can be charged even on a 0% offer. The fee is usually added to your balance right away.

The rate after the promotion

When the promotional period ends, the card’s regular rate applies to any balance left. That rate can be as high as, or higher than, the card you moved away from.

A quick example

These numbers are only for illustration. You transfer $4,000 to a card with a 0% promotional rate for 15 months and a 3% transfer fee:

	Amount
Transfer fee (3% of $4,000)	$120
New balance	$4,120
Monthly payment to clear it in 15 months	about $275

If you can pay about $275 a month, you clear the debt before the promotion ends, paying the $120 fee instead of months of interest. If you can only pay $150 a month, about $1,870 would be left when the regular rate starts.

The trap with new purchases

This catches many people. The CFPB has warned that if you carry a promotional balance past the due date, you can lose the card’s grace period, so new purchases start collecting interest right away. The only way to avoid that interest is to pay the whole statement balance, including the transferred amount, by the due date.

The simple fix: don’t use the balance transfer card for new purchases.

When a balance transfer can help

• Your credit is good enough to qualify for a low or 0% promotional rate.
• You can pay off most or all of the balance before the promotion ends.
• You’ll stop adding new charges to the old card and the new one.
• The fee is less than the interest you’d otherwise pay.

When it probably won’t

• You can’t qualify for a promotional rate, or the credit limit is too low to move much.
• You can only afford minimum payments, so most of the balance will still be there at the end.
• You’re already behind on payments. A transfer won’t fix that, and a new application may be declined.

Tips for using one well

1. Read the terms: the promotional rate, how long it lasts, the fee and the regular rate.
2. Divide the balance by the number of promotional months. That’s your monthly target.
3. Set up automatic payments for at least that amount.
4. Never miss a payment. A late payment can trigger a penalty rate, as your card agreement explains.
5. Leave the old card at zero. If you keep it open, don’t run it back up.

Alternatives to compare

• A debt consolidation loan, with a fixed rate and end date. See debt settlement vs. debt consolidation.
• A debt management plan through a nonprofit credit counselor, which may lower your rates without good credit.
• A focused payoff plan using the debt avalanche or snowball.

The CFPB also cautions that some ads for “consolidation” actually come from debt settlement companies, which often charge fees. Read what is debt settlement to know the difference.

The bottom line

A balance transfer is a tool, not a cure. It works when you have a plan to pay off the balance before the promotion ends and you keep new spending off the card. If the math doesn’t work, compare other options before you apply. To understand the interest you’re trying to avoid, read how credit card interest works.

Sources: CFPB: consolidating credit card debt · CFPB: balance transfer fees · CFPB: interest on a zero percent offer