If I had to define a “credit card balance transfer,” I’d start by saying that it 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 your existing credit card debt (a balance transfer counts as a payment).
So the same amount of debt (plus any applicable balance transfer fees) is transferred from your existing 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
Simply put, a balance transfer works exactly how it sounds – a balance is…transferred.
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, promising you a reduced interest rate for a promotional period or for the life of the balance.
If you agree to their offer, 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.
Additionally, your credit card balance with credit card issuer “A” would now be $0.
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 entertain such an offer, there must be perks of some kind.
How to Do a Balance Transfer?
- Balance transfers can be executed in a number of different ways
- You can apply for one online just like a normal credit card application
- Or make a request with an existing credit card issuer via their website
- It’s also possible to cash a balance transfer check like a normal check
Once you’ve found the appropriate balance transfer offer online (or offline), you’ll be prompted to fill out a short form, just like you would if it were a credit card.
In fact, most balance transfer offers will be included within associated credit card applications, assuming its not a balance transfer offer with an existing credit card issuer.
Aside from the basics, like your name, address, employment information, and social security number, you’ll typically be asked if you want to “transfer any balances.”
If you select yes, you’ll need to provide some basic information from your current credit card issuer so the new issuer knows exactly what to pay off and where.
Let’s look at an example:
Current credit card issuer: Chase
Existing credit card debt: $5,000 @13.99% APR
New credit card issuer: Discover
Balance transfer offer: 0% APR for 12 months, no fee
In this scenario, you’d be transferring the $5,000, or some portion of it if you choose, from your Chase credit card to your new 0% balance transfer credit card offered by Discover.
So on the balance transfer form (which is typically just a new credit card application), you’d have to specify that you’re paying off the Chase credit card balance and moving it to the Discover credit card by including the bank name (Chase), the Chase account number, and the amount you’d like to transfer.
Keep in mind that you can transfer balances from multiple credit cards all at the same time, assuming you’ve got a high enough balance transfer limit to do so.
You’ll need to know the following information when completing your balance transfer request:
– Existing credit card issuer (sometimes referred to as the “balance transfer bank” name)
– Existing credit card number
– Balance transfer amount
*In some cases, you will only need to put in the credit card number and amount you want transferred.
Once you submit the form, it’ll take anywhere from a few business days to a couple weeks for the balance transfer to go through (how long do balance transfers take?).
The balance transfer will work just like a normal payment, except instead of being made by you, it’ll be made by Discover.
So a payment will appear for the amount you specified to be transferred, and that amount will represent your new balance with Discover.
This in essence, is how the “balance is transferred.” In reality, your existing credit card debt is paid off by your new credit card issuer, then that payment becomes your new balance.
And instead of paying 13.99% in finance charges each month, you’ll enjoy 0% APR for 12 months, making it all that much easier to get out of debt while avoiding unnecessary interest charges.
Balance Transfer Incentives
- There are many benefits to a balance transfer
- The biggest being a lower APR, ideally 0% APR for some period of time
- This can make it easier to get out of debt as all of your payment goes toward the outstanding balance
- As opposed to being split between fees and your balance
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 interest expense.
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
- The actual amount of money saved will vary based on your unique situation
- If your current credit card’s APR is 20%+ on a large balance you could save thousands
- Assuming you’re able to move the debt to a 0% APR credit card
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?
- If you want to get out of debt and save money
- A balance transfer is a great tool to accomplish both those things
- Best of all is they are often free and easy to execute
- Just be sure to read the fine print to ensure it’s a good deal
Simply put; 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.
Tip: Look for a no fee balance transfer credit card to avoid fees.
When to Do a Balance Transfer?
- If you currently have a lot of credit card debt that is subject to costly finance charges
- And you are unable to pay it off in full each month
- It could make sense to move that debt via balance transfer to a 0% APR card
- That way every dollar of every payment will go toward the outstanding balance as opposed to fees
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
- The most effective way to lower your credit card interest rate is via balance transfer
- It’s the only way to get your APR down to 0%
- You can ask your credit card issuer to lower your interest rate as a courtesy
- But it’ll likely still be in the teens or higher and quite costly relative to 0% APR
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.
Read more: Should I do a balance transfer?