What Is a Balance Transfer?

by Sara Lindberg - Updated May 07, 2018
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If you have outstanding credit card debt that you’ve been unable to pay off, chances are, you’re paying a high-interest rate on it. The good news is, you have options. You can consider moving the balance to another card that has a zero percent introductory offer for at least a year and then makes a plan to pay off your balance within that time. This process is usually done to save on interest payments each month.

What Is a Balance Transfer?

A balance transfer credit card can help you get out from under a mound of debt that comes with a high interest-rate on your current credit card. Basically, you transfer the balance on your current card to a new credit card with a lower interest rate. Depending on how much your new credit limit is, you can transfer all or some of your balance to the new credit card. For example, if your new credit card company caps your limit at $2,500 and you owe $5,000, you will only be able to transfer over $2,500. This will require you to pay on two credit cards.

How Does a Balance Transfer Card Work?

To complete a balance transfer, the first thing you need to do is find a credit card company with the rates you want and fill out the application. Once approved, you can transfer over some or all of the balance on your high-interest credit card to the new credit card you just opened. There is one caveat: make sure you continue to pay on your current card until the transfer has been completed. Just because you’ve been approved, doesn’t mean the transfer happens immediately. You are still responsible for paying on your current card until you've been notified that your new credit card is ready to use.

Before you sign on the dotted line, you need to do your research. Make sure you understand any hidden fees or limitations the new credit card company has. Look for the fine print that explains the balance transfer fees, interest rate increases after a certain amount of time and the annual fee a card may have. If you are going to transfer debt from one card to another, you want to make sure you are saving money, not spending more.

Depending on the balance credit card you choose, the introductory offer could be a zero percent interest rate for up to 12 months. If you can pay your balance off in that amount of time, then a balance transfer card is a good idea. But if the interest rate goes sky-high after the introductory period and you haven’t even scratched the surface on your balance, then you may not save much money in the long run.

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Do Balance Transfers Affect Your Credit Score?

When you apply for a new credit card, the lender or company will do a credit report on you to see if you are a high-or-low-risk borrower. This credit inquiry will initially drop your credit score a few points. But it typically bounces back within a few months as long as you make a plan to aggressively pay off the debt on your new balance transfer credit card. This will help you get out of debt faster, which has a positive impact on your credit score.

If the balance on your old credit card is now zero, you may want to consider keeping that card open but locking it up so you don’t use it. That’s because consumers with a longer credit history will see the age of their oldest account reflect positively on their FICO score. Banks want to know what kind of borrower you are, the risk that lending to you poses and that you have a long and well-established credit history. For these reasons, experts recommend keeping a few older credit card accounts open, even if you don’t use them.

About the Author

Sara Lindberg, B.S., M.Ed., is a freelance writer focusing on health, fitness, business, and education. She holds a Bachelor’s of Science degree in exercise science and a Master's degree in counseling.

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