What Is a Balance Transfer and Is It a Good Idea?

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Credit card debt can be a serious drain on your finances, especially if you’re paying a high interest rate on your balance. A balance transfer can reduce your interest rate, lower your payments and help you pay the debt off sooner.

What Is a Balance Transfer?

A balance transfer occurs when you move the balance of one or more credits cards onto a different card that has a lower annual percentage rate. The money you save on interest can go toward paying down the balance.

Is It a Good Idea To Do a Balance Transfer?

A balance transfer consolidates debt while giving you some breathing room on the amount of interest you’d be paying on the principal — ideally, you’ll transfer your balances to a 0% APR card. That benefit, if nothing else, might be reason enough to execute a balance transfer if you’re working with high-interest debt or multiple sources of debt.

That said, a balance transfer could set you back if you’re not careful. Credit cards rarely offer an indefinite 0% percent APR. Most credit cards switch to a variable APR rate after a year or so, and in some cases, the APR could be higher than what you’re used to paying on one card. There are also balance transfer fees to consider, but these are usually small and dependent upon the amount you’re transferring.

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A balance transfer can cost you more in the long run if you accumulate new debt on the credit cards from which you transferred balances. Using the original cards judiciously and repaying the balances each month is imperative to reaping any benefit from the balance transfers.

How Does a Balance Transfer Work?

To see how a balance transfer works, consider the following example:

At this rate, it would take 14 months to pay your balance in full, and you’d pay $349 in interest during that time.

If you were to transfer the balance to a 0% APR card and continue making $300 payments, you’d pay off the debt in 12 months and save $349 in interest. Or you could reduce your payment to $250 per month and still repay the debt in 14 months and save $349 in interest.

Credit card repayment calculators found on any number of websites let you plug in your own figures to see how much you can save.

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How Do I Transfer a Balance?

If you’ve considered the benefits and risks and decided that a balance transfer will work in your favor, you can do it fairly quickly with a little planning and patience.

1. Choose a Balance Transfer Card

The first step in transferring a balance is to select the best balance transfer card. Ask the following questions before making a decision:

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2. Apply for the Credit Card Balance Transfer

Select the balance transfer credit card offer you’d like to accept and fill out the application with the requested information. To have the lender determine your creditworthiness, you’ll typically need to provide your:

The application for the balance transfer card will also ask about the following:

3. Wait for Balance Transfer Approval

From the time of your application, it can take about two weeks for the approval and balance transfer to be complete. During this time, protect your credit score and avoid late fees by continuing to make on-time minimum payments on the credit cards from which you’re transferring balances. The statements you receive after the transfers go through will reflect your paid-off balances and show that your whole credit limits are available.

Good To Know

Although balance-transfer-card issuers were looking for credit scores of 670 or higher before the pandemic, you’re likely to need a score of at least 720 in 2021, according to Acorns. If you can’t qualify on your own, consider asking a creditworthy family member to co-sign your application or serve as a joint applicant.

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Do Balance Transfers Affect Your Credit Score?

The actual act of transferring debt does not affect your score, meaning it’s not a factor in determining whether you lose or gain points. But the other factors involved in a balance transfer, such as opening up a new credit card account to facilitate the transfer and increasing your total available credit, do affect your credit score.

Your credit score is determined in part by the number of accounts open as well as your balance-to-limit ratio, or utilization rate. By keeping your old accounts and opening a new one with the same amount of debt, you’re improving your open credit lines and your credit utilization. On the other hand, your score could take a small hit from the credit inquiry resulting from your application, and a new account could reduce the average age of your credit history, which can also have a negative impact on your credit score.

Attack Your Credit Card Debt

Look at your budget and create a payment plan that will allow you to attack your debt at a more aggressive pace. You might even want to set a goal of paying off the balance before your introductory rate comes to an end. It’s also a good time to review spending habits to avoid accumulating new debt after your transferred balances have been repaid.

Daria Uhlig and Sean Dennison contributed to the reporting for this article.