How Do Balance Transfer Credit Cards Work?

By Lisa Williams, YourLife Financial Coach

Balance transfer credit cards allow you to move debt from a credit card, or a loan, that’s charging you interest, to a card that doesn’t charge interest for a period of time.  After the introductory period ends, the card’s standard interest rate becomes effective. 

Transferring balances can help you save on interest payments, but there are a few things to be aware of before you make that decision.

It’s important to understand how the 0% APR introductory period works.  Some cards allow a 12 month period, while others may offer 18 months or more.  The longer the better.  Ideally, you want to pay off the balance before the introductory period ends.  Make sure you know exactly when the introductory period ends and how much interest you will be charged at that time. 

Pay attention to your payment due dates.  If you make a late payment, you may lose the 0% promotional APR and may even be charged a penalty APR that’s higher than your credit card’s standard rate. 

Be sure to read the interest rate information on your statements to determine how new purchases will be billed.  They may incur the variable APR, even though the transferred balance is not incurring interest.

Take into account the balance transfer fee.  Most balance transfer fees range between three to five percent.  A higher fee may be associated with longer 0% APR periods or no late fees.  Paying a balance transfer fee may be worth it if it means that you’ll pay less in interest than the cost of the fee.  There are some cards that do not charge a balance transfer fee, but the 0% intro APR will probably be for a shorter period of time.

Usually, you cannot transfer a balance between two cards from the same company.  For example, you can’t transfer a balance from one American Express account to another type of American Express account.  If you’re considering applying for a new card that has a balance transfer offer, look for a card with a different issuer than your other card(s).   

You may already have a credit card that offers balance transfers.  If not, remember that applying for a new credit card can have an impact on your credit scores.  It will be reflected as a hard credit pull, which could lower your credit scores by a few points.  Obtaining a new card will reduce the average age of your accounts which can slightly lower your score. On the positive side, having a greater amount of accessible credit can reduce your credit utilization ratio, which could raise your score. 

If you’re thinking about transferring a balance, consider if moving your debt to another card, or to a new card, will save you money.  If so, it could be the right decision for you.

Lisa Williams is one of our YourLife Financial Coaches. If you’re interested in learning more about our coaching program, click here.