Put simply, a balance transfer works exactly how it sounds – a balance is…transferred.

A “credit card balance transfer” is somewhat similar to a mortgage refinance, in that you pay off existing debt with a newly issued loan. The glaring difference is that the new loan is simply a new credit card (or sometimes an existing one).

When a bank or credit card issuer offers to “transfer a balance,” it may be a little misleading. Sure the balance is transferred, but not before being paid off.

It is “moved” when the balance transfer credit card issuer pays off the existing credit card debt (a balance transfer counts as a payment).

So the same amount of debt (plus any balance transfer fee) is transferred from one credit card to the balance transfer credit card.

Let’s look at an example of how a balance transfer works:

Credit Card A (existing credit card): $2,500 balance @21.99% APR
Credit Card B (balance transfer credit card): 0% APR for 12 months

Imagine that you have an existing credit card with a $2,500 balance with credit card issuer “A”. Now suppose credit card issuer “B” sends you a balance transfer offer to move that debt to them.

If you agree, credit card issuer “B” will send credit card issuer “A” a check for $2,500 to satisfy the outstanding debt.

So your $2,500 in credit card debt would now be held by credit card issuer “B”, and you would make payments to them going forward.

Credit Card A ========> Credit Card B

Notice that your balance doesn’t actually change with a balance transfer.  It is merely “transferred” from one credit card issuer to another.  This is essentially how a balance transfer works. Of course, in order for you to consider such an offer, there must be perks of some kind.

Balance Transfer Incentives

Balance transfer benefits typically come in the form of a lower APR, which is generally 0% APR for a given time period. Whatever it is, it should be lucrative enough for you to transfer the balance to credit card issuer “B”.  In reality, it won’t take much to sway you, assuming you’re currently paying hefty finance charges on that $2,500 balance.

If credit card “A” is set at a standard credit card interest rate, such as something in the teens, the 20% range or higher, there’s a good chance it will make sense to accept the balance transfer offer, as it will dramatically lower your APR.

However, you’ll still need to consider balance transfer fees, which generally range from 3% to 5% of the balance transfer amount.

In our example above, if the $2,500 was subject to a 5% balance transfer fee, you’d be stuck paying $125 to transfer the debt.  So your new credit card balance with credit card issuer “B” would actually be $2,625.

Balance Transfer Savings

Now this may not be a bad deal if your current APR is set at 21.99% on that $2,500 balance. Using simple math, you’d be paying roughly $46 in interest each month on that balance and $550 annually if you continued to carry the balance with credit card issuer “A”. So a $125 balance transfer fee pales in comparison.

Additionally, credit card issuer “B” may offer you 0% APR for 12 months or longer, or a low fixed rate, which would clearly save you money in the long run.

Why Do a Balance Transfer?

Put simply; to save money. Lots and lots of money (depending on your situation).

There’s not much mystery surrounding the why of credit card balance transfers, perhaps just uncertainty or a lack of knowledge.

Credit card issuers don’t do a great job explaining them, that’s for sure.

In short, credit card balance transfers are designed to save credit cardholders money on credit card interest if and when they carry a balance.

When to Do a Balance Transfer?

The problem with credit cards is that they tend to lead to a big old pile of debt.

Spending gets out of control and before you know it, you’ve maxed out your credit card(s).

That’s where a credit card balance transfer comes in handy.

If you can’t pay your balance in full, and you’re being bombarded by finance charges, it’s a great time to look into a balance transfer.

How to Lower Credit Card Interest Rates and Pay off Debt

Ultimately, there are a couple of ways to lower your credit card interest rates, but perhaps the easiest and most successful method is via a balance transfer credit card.

To avoid paying such fees, you could ask your credit card issuer to lower your APR to a more reasonable level, which is something they may or may not do.

Or you could transfer the debt via a 0% APR balance transfer.

The former is a voluntary action by the credit card issuer, and could fall on deaf ears. Even if they do agree to lower your APR, it will likely still be in the teens, which will remain very costly for you.

If you employ the latter strategy, which is a slam dunk assuming you’ve got a decent credit score, you’ll save some serious money, at least during the promotional 0% APR period.

So that’s it; it’s really simple stuff and quite beneficial if you’re looking to pay off credit card debt the cheapest way possible.

Consider this your primer on credit card balance transfers. They’re pretty easy to understand and generally straightforward, just make sure you read the fine print before agreeing to one.

Tip: Look for a no fee balance transfer credit card to avoid fees.