How Balance Transfers Work, and When They Don't Help

If you're carrying credit card debt at a high interest rate, a balance transfer offer can look like a way out: move the balance to a new card and pay little or no interest for a while. Sometimes it does help. Other times, fees, deadlines and spending habits mean it simply moves the debt from one place to another. Here's how balance transfers work and how to think through whether one fits your situation.

What a balance transfer is

A balance transfer moves debt from one or more existing accounts, usually other credit cards, onto a different credit card. The new card pays off the old balance, and you then owe that amount to the new card's issuer instead.

Many balance transfer offers come with a low or 0% introductory APR on the transferred amount for a set number of months. During that period, more of each payment can go toward the balance itself rather than interest. When the introductory period ends, any balance that's left typically starts accruing interest at the card's regular rate.

The costs and conditions to check

• Balance transfer fee: Many cards charge a fee, often a percentage of the amount transferred. It's usually added to your new balance.
• Introductory period: The low rate lasts for a specific number of months, stated in the offer. The terms often also set a deadline for completing transfers in order to get the promotional rate.
• Regular APR afterward: Whatever balance remains when the intro period ends will be charged the card's ongoing APR.
• Credit limit: You generally can't transfer more than the new card's credit limit allows, and the fee counts toward that limit. You may not know your limit until you're approved.
• Same-issuer restrictions: Issuers generally don't allow transfers between two cards they both issue.
• Terms for new purchases: The intro rate may apply only to transferred balances, not to new purchases.

Example: doing the math

This is a hypothetical example with round, illustrative numbers, and it uses simplified interest calculations. Real card interest is usually calculated daily, so actual results would differ somewhat.

Say you owe $5,000 on a card with an example APR of 20%. You're considering a card with an example 0% introductory APR on balance transfers for 15 months and an example transfer fee of 3%, or $150. Your new balance would be $5,150. Dividing $5,150 by 15 months works out to about $345 a month to pay it off before the intro period ends.

In this example, the transfer saves the most when the payments keep pace with the intro period. In Example C, $1,400 is still owed when the intro period ends, and it starts building interest at the card's regular rate. The transfer may still cost less than staying put, but how much less depends on that rate and how quickly the rest is repaid.

When a balance transfer may not help

• The balance is small or nearly paid off. If you could clear the debt in a few months anyway, the transfer fee may cost about as much as, or more than, the interest you'd save.
• The payments won't fit before the intro period ends. If the monthly amount needed is out of reach, a large balance may remain and start accruing interest at the regular rate.
• Spending continues on the old card. A transfer frees up credit on the original card. If that credit gets used again, it's possible to end up owing on both cards.
• New purchases go on the transfer card. On many cards, carrying a balance, including a transferred one, means new purchases don't get an interest-free grace period and can start accruing interest right away.
• A payment is missed. Depending on the card's terms, a late payment can mean a late fee, losing the promotional rate or being charged a penalty APR.
• Approval or the credit limit isn't what you expected. Applying doesn't guarantee approval, the advertised promotional terms, or a limit large enough to move the whole balance.

How it can affect your credit

Applying for a new card usually results in a hard inquiry, and opening a new account lowers the average age of your accounts. Both typically have a modest, temporary effect. On the other hand, a new card adds to your total available credit, which can lower your overall utilization if your balances don't grow. A large transferred balance can also leave the new card close to its limit. How these effects net out depends on your full credit profile.

A step-by-step way to decide

1. List your balances and rates

   Write down each card balance, its APR and your current monthly payment.

2. Read the offer's terms

   Note the intro APR, how long it lasts, the transfer fee, any deadline to complete transfers and the regular APR afterward.

3. Calculate the payment that clears the balance

   Add the fee to the balance and divide by the number of intro months. Consider whether that payment fits your budget.

4. Compare total costs

   Estimate what you'd pay in interest by staying put, and compare it with the fee plus any interest after the intro period.

5. Plan for spending

   Decide how you'll avoid adding new balances to either card while you pay down the transferred amount.

6. Automate payments

   Automatic payments for at least the minimum due can help you avoid a late payment that could affect the promotional rate.

Other approaches people consider

A balance transfer is one tool among several. Some people ask their current card issuer about a lower rate, follow a structured payoff method such as paying the highest-rate balance first, consolidate with a fixed-rate personal loan, or talk with a reputable nonprofit credit counseling agency about a repayment plan. Each option has its own costs and trade-offs.