What is a Balance Transfer Credit Card? How to Save Money on High-Interest Debt

In my experience, the biggest hurdle to paying off credit card debt is often those pesky interest rates. What if you could lower or even eliminate interest rates on your highest APR cards for a while? Well, you can — and it’s actually pretty common.

A balance transfer credit card allows you to transfer your debt from another card and offers a lower or 0% interest rate on that debt for a certain period — often between six and 18 months. Once that period ends, you need to be wary of potential fees for your outstanding transferred balance and the card’s regular APR.

If you transfer high-interest debt to a balance transfer credit card, you could pay little or no interest on that debt for up to 18 months (or longer).

I took the liberty of gathering all the information you need about balance transfer credit cards, including their strengths and weaknesses, tips for choosing the right card, and how to transfer balances correctly.

Balance transfer credit cards allow you to move your existing credit card balances to take advantage of much lower interest rates — typically a 0% introductory APR. This way, you can save a lot on interest, making it easier to pay off the debt sooner.

Introductory APR Periods

To get the most out of a balance transfer, you need to be aware of the promotional APR period. During this period, the interest charged on transferred balances drops considerably from the norm, almost always to 0%.

The 0% APR introductory rate period lasts six to 18 or more months, depending on the credit card provider. The transferred balance incurs no interest for the duration of the promotional period. 

It’s essential to pay off your transferred balance during the promotional period. If you don’t, you’ll be subject to the standard interest rate, which can cost you a lot of money. If you want to take advantage of the benefits of balance transfers, you need a solid repayment plan. 

The first step is to check your credit card’s terms before applying. It’s easy to gloss over all the fine print, but this can be the difference between living debt-free and financial ruin: Some cards cancel the lower APR if you make a late payment or exceed your credit limit. If you trigger one of those penalties, then you’ll end up paying way more than expected. 

Balance Transfer Fees

Balance transfers aren’t free. Cards usually charge a percentage of the overall amount transferred as a fee, likely from 3% to 5%. For instance, if you transferred $5,000 and were charged 3%, you would pay a $150 fee.

You’re only charged a small amount per transfer, but things can really add up. Make sure you include these fees in your calculations when deciding if a balance transfer is right for you. Occasionally, cards have promotions that waive the transfer fee for some months, which can be a valuable plus.

Types of Balances You Can Transfer

Not all debts are eligible for balance transfers. Generally, credit card issuers allow you to transfer the following types of balances:

• Credit card debt from other cards
• Personal loans and credit lines
• Store card balances
• Certain auto loans — it’s up to the issuer if they’ll allow this

These represent the most common forms of high-interest debt. By transferring them to a 0% APR credit card, you save money and gain flexible management of your payments. 

As a matter of fact, I plan to use a balance transfer card next year when my car lease expires. I will be able to purchase the car for about $20,000, which I can borrow for around 4%. I plan to take the auto loan and then immediately transfer it to a new balance transfer card with a 0% APR for 18 months, a 3% balance transfer fee, and a $20,000+ credit limit. 

Here’s the fun part: I already have the $20,000 set aside. I will use it to repay the balance the day before the promotion expires. That lets me invest $20K for a year and a half without paying any interest on the car loan. Can something like this work for you?

Balance transfers can be potent debt-slaying weapons — if used wisely, that is. Consider these pros and cons to make an informed decision. 

Benefits

• Lower Interest Rates After transferring your balance, the interest rate on your debt should be low, if not 0%. This way, all of your monthly payments go toward the principal, so you’ll pay off your balance much faster.
• Debt Consolidation: Balance transfers allow you to combine several debts into a single payment. In addition to the convenience of reducing the number of bills you need to track, it can also reduce your overall interest rate. It’s way easier to handle one monthly bill as opposed to, say, five or six. 
• Paying Down Debt Faster: Like I said above, not having to pay money toward interest means that you’ll pay off the principal much faster. In addition to the benefits to your financial health, this also means you’ll have more money at your disposal per month, since your payments will probably be lower.
• Potential Positive Effects on Your Credit Score: If you handle it properly, a balance transfer can boost your credit score. You’ll reduce your overall debt, and show that you can make timely payments. Just make sure you can make timely payments. 

Drawbacks

• Balance Transfer Fees: Most balance transfer cards charge a fee ranging from 3% to 5% of the amount transferred. This can add up quickly, leading to some pretty big charges. It’s important to calculate whether the interest savings outweigh the cost of the fee (hint: it usually does). For some consumers, the cost of the fees outweighs any money they’d save doing a balance transfer.
• Promotional APR Expiration: Those low APRs don’t last forever. Usually, they’ll last for about six to 18 months, sometimes longer if you’re lucky.  After that, they revert to the standard interest rate (or regular APR), which is much higher. This is where many balance transfers end up causing more trouble than they’re worth: if you can’t pay off your balance during the promotional period, you’re in deep trouble 
• Impact on Credit Score: The hard inquiry from a new card application can cause your score to dip slightly. Closing old accounts after transferring balances may also harm your credit history. Be careful with your credit card accounts so these effects don’t worsen your credit score.
• Short Deadlines: Some balance transfer cards mandate that you complete all transfer requests soon after opening an account — often 45 or 60 days. You’ll lose the promotional APR. If you miss these deadlines, you must move fast and stay organized. 

You need to go over your financial situation before you can decide if a balance transfer card is right for you. If you think one is a good fit, check for any promotional offers to see if a card offers the perks you need, then make sure you read the fine print to avoid any nasty surprises. 

Find and Compare Promotional Offers

Credit cards are more than just their interest rates. While it’s important to find one with a low APR, you should also check the balance transfer fees, what the APR will be after the promotional period, and what annual fees it has. Perks like cash back and travel benefits are also a plus, if you can get them. 

Sites like CardRates.com offer side-by-side reviews of balance transfer cards, but you shouldn’t just take our word for it. Check user reviews and consider finding a financial advisor. They may be able to offer more personalized recommendations. 

Read the Fine Print

Watch out for the most common pitfalls in the agreement regarding balance transfers, like hidden fees and penalties. These can cost you your promotional APR, like missing payments. If you’re not careful, what was supposed to be a lifeline could end up pulling you even further into debt.

You need to make sure you understand all the terms and conditions to rule out any surprise charges. You also need to know the length of the introductory period, as well as what the regular APR will be. 

Evaluate Your Financial Situation

Check your budget: can you afford to make monthly payments on this new card? Does it fit your long-term financial goals? There’s no point in going for a balance transfer if it leaves you in a worse position than where you started, so don’t leap in blindly. 

It’s a good idea to write down your primary financial goals (e.g., reducing your debt, increasing your credit score) so you can ensure the balance transfer card you apply for will work well with those goals. 

Additional benefits, such as cash back, can be a major financial boon. Really, you should treat this new card as an opportunity to restructure your finances and set up more manageable repayments. Just remember, these are tools to get you out of debt, so don’t misuse them!

Transferring balances is not rocket surgery, but it does require a certain amount of care and consideration to maximize benefits and minimize costs. Follow the three steps to transfer balances efficiently:

1. Apply for a Balance Transfer Card

Everything hinges on choosing the right card, so don’t just choose the first one to send you an offer. Find a couple of potential candidates, and then start vetting them. 

• Evaluate competing cards: Compare promotional offers, fees, and terms on balance transfer cards. Look for cards with the longest 0% introductory APR periods and the lowest balance transfer fees. Consider additional benefits like rewards and low annual fees.
• Provide documents and information needed for an application: Make sure you have all the necessary documents and information in hand before you apply. That means your Social Security number, proof of income, and details regarding your current debts and account numbers. Having these ready will smooth the application process. Accurate and complete information makes it easier for you to get approved.
• Improve your approval chances: Check your credit score and correct any issues on your credit reports before applying. A higher credit score improves your approval odds for the best balance transfer offers. Reduce existing debts as low as possible to lower your credit utilization ratio. Always apply with accurate and updated information to avoid unnecessary delays or rejections.

These steps will help you obtain the best terms and the biggest savings.

2. Initiate the Transfer

After receiving approval for a balance transfer card, you will need to request the transfer, which involves communication between yourself and both card issuers so the transfer is smooth and accurate.

• Request a balance transfer during or after the application process: Follow your credit card issuer’s steps for balance transfers. This can be done during the application process or after you receive your new card. You’ll need to provide data such as each card’s account number and the amount of money to transfer. Review your transfer requests to ensure you’ve filled everything out appropriately.
• Communicate with credit card issuers: You should contact your old and new credit card issuers to ensure a smooth transition between accounts. The new card issuer manages the bulk of the transfer. Monitor the process for any errors or glitches, and keep a record of any letters and confirmation notices received from either card issuer in case you need them later.

You should request transfers soon after obtaining a new balance transfer card because some cards impose a short deadline. For example, one issuer gives you only 45 days to request your balance transfers, even though the promotion period lasts 15 months. All things being equal, I highly recommend you use an issuer who doesn’t expose you to this ticking time bomb.

In short, quick requests enable you to make transfers without any glitches and immediately take advantage of a low interest rate.

3. Responsibly Manage Your New Account

After the transfer (and, really, at all other times), it’s essential to manage your account responsibly. This includes setting up a repayment plan and not accumulating new debts.

• Set up a repayment plan: Develop a payback plan that will allow you to pay off the transferred balance before the end of the promotional period. Calculate the required monthly payment amount and make it your target. I recommend you set up automatic payments so you never miss one. Keep measuring your performance over time, and do not hesitate to modify the plan if you need to.
• Avoid new debt accumulation: Control your spending and do not spend carelessly. You must focus on paying off the existing balance rather than adding new charges. It’s wise to check your account regularly to ensure everything goes as planned.

After the transfer, you must maintain financial discipline to clear your debt within the promotional period. I have faith you can do it! You are a CardRates.com reader, after all.

Balance transfers are not the only options for high-interest debt. You can also consider personal loans or a debt management plan to resolve your debt challenges.

Personal Loans

Personal loans with a set interest rate from banks, credit unions, or online lenders are available to consumers. You must typically repay these loans in equal monthly installments over the loan term. Debt consolidation is a popular reason for taking a personal loan.

Pros Compared to Balance Transfers

Personal loans generally have a fixed interest rate lower than a credit card’s (except for cards with 0% APR promotions). The low rate offers more affordable monthly payments that can help your budget. The payback periods are also usually longer than credit card promotional periods, so you can repay at a more leisurely pace. 

The interest rate will not change during the loan’s life, so you don’t need to worry about losing your promotional interest rate. Plus, if you have other debts outside of your credit card, you can use a personal loan to pay those off too.

Cons Compared to Balance Transfers

Personal loans often have origination fees that add to the cost of financing, and which can cost a lot more than a balance transfer fee. They may also require a higher minimum credit score for approval than balance transfer cards. 

Their fixed repayment term may be shorter, leading to higher monthly payments. Plus, like all loans, failing to pay can seriously hurt your financial health.

Situations Where Personal Loans Might Be Better

Personal loans can be good when you need one big lump sum of cash. They are also helpful if you prefer fixed monthly payments and reasonable interest rates. This sort of loan is more cost-effective if you have a good credit score and qualify for a low-interest loan. 

Personal loans may be the best option to consolidate different types of debt, like car loans, since you aren’t limited to just credit card debt. 

Debt Management Plans

Debt management plans (DMPs) are systematic repayment and settlement plans that help you pay off your unsecured debts, such as the remaining balances on credit cards and medical bills. 

These plans commonly operate with the assistance of credit counseling agencies. Some DMPs may also negotiate debt forgiveness, in which creditors reduce the owed amount to help the borrower become debt-free.

Working With Credit Counseling Agencies

Credit counseling agencies help you prepare an organized repayment plan for your financial needs. They also negotiate with creditors for an interest reduction and a fee waiver. These people are professionals, so they can usually get you better terms than what you could manage on your own. 

These agencies also offer financial education and support to help you avoid future debt problems.

Structure and Benefits of Debt Management Plans

These plans help you lower your monthly payments. You make a single monthly payment, which the plan manager divides up and forwards to your creditors. A structured plan should clear your debt in three to five years.

Benefits include partial loan forgiveness, reduced interest rates, waiver of fees, and a clear path toward becoming debt-free. The downside is that forgiven debt takes a heavy toll on your credit score and may be taxable.

Using Proven Payoff Strategies

You’ve probably heard of the Snowball and Avalanche methods. These are the two most effective ways to pay off debt. In the Snowball method, you first pay off the smallest balances to build motivation and momentum to pay off the rest of the debt. 

Through the Avalanche method, you attack high-interest debts first to save more money over time. Both have distinct advantages based on your financial goals or personal preferences.

If money is tight, consider the Snowball method. It focuses on paying off small balances first, which can be encouraging because it provides you with some quick wins. 

Little victories can boost your momentum, help ramp up motivation, and make it easier to stick to your debt repayment plan even when you’re strapped for cash.

Balance transfer credit cards can help you save money on interest when repaying debt. They also allow you to repay your debts faster because all your money can go toward paying down the principal. 

These credit cards make debt easier to manage, as you have only one monthly payment rather than multiple credit card debts. However, you need to be careful. If you don’t check the terms and conditions, you could run into short deadlines or penalties that will let the issuer cancel the promotional APR.

Like any credit product, you’ve got to use balance transfers carefully. Otherwise, you’re just digging yourself deeper into the debt hole.