What is a Balance Transfer?

When it comes to making life easier, swiping plastic ranks right up there with coffee pods, cell phones, and Uber. But convenience can come at a steep price. Fail to pay off your statement balance by the due date, and the credit card issuer will charge interest—a fee expressed as a percentage of the amount you owe. (So the greater your balance, the more interest accumulates.) Not only is interest a money-sucking hassle, it’s also a slippery slope since you end up paying interest on your interest. 

Americans shelled out a whopping $113 billion in credit card interest in 2018, up 12 percent from the year before. If you carry a balance, chances are you’re part of that staggering sum. Gulp.

Want to escape the debt treadmill? You may have heard that balance transfer credit cards can help. While it’s true that they can give you a leg up on slashing debt, there are also some things to watch out for. Here’s the deal.

What’s Up With Balance Transfer Credit Cards?

If your plastic has a high interest rate, a balance transfer card lets you move your outstanding balance to a new account with a low (or even zero) annual percentage rate, or APR, for a limited time (generally, the first year or two). Essentially, you’re paying off your credit card debt with another credit card—the difference is, the interest you’re paying on it should be much lower. 

You can also put other kinds of debt onto a balance transfer card—like auto loans and personal loans. The only exception? You typically can’t transfer money between accounts from the same bank. For example, you can’t use a Chase balance transfer card to pay off a Chase credit card.

How Does a Balance Transfer Work?

Once you select a card (more on that later), you need to contact the issuer via phone or email. Tell them the credit card account number you’d like to move the balance from, and the total you want to put on the new card. Depending on your credit limit and the credit card company’s policies, they might green light your request in full or approve a partial amount.

Make sure you’re on the ball when it comes to setting up the transfer. Not only will it cost less in the long run to limit how much time your debt is sitting in a high interest account, but some cards offer incentives—like waiving certain fees—if you move over the balance ASAP. Plus, cards often have a favorable introductory period with minimal interest rates; you want to take advantage of that bargain for as long as you can.

Balance transfer requests are usually processed within a week or two, but can take up to six weeks. In the meantime, you should continue making payments on your existing account to avoid being hit with late penalties and even more interest. 

Would a Balance Transfer Card Make Sense for Me?

If you have a credit card or loan with a steep interest rate, it might be a good idea to funnel your outstanding bills to a card with a lower APR. Doing so can help you pay off your card faster, get ahead of outstanding debt and boost your credit score.

A balance transfer might also be a smart move if you’re carrying debt on several different cards. Instead of having to keep track of paying off each of them, you can consolidate them all into one place. 

Any Downsides?

Balance transfer cards typically charge a three to five percent fee on the sum you shift over. Before signing up, do the math to figure out if what you’ll save in interest is worth the cost. 

Let’s say you want to transfer $2,000 to a card that offers zero-percent interest for a year. The transfer includes a 4 percent fee so that transaction will cost you $80. If your current credit card has an 18 percent APR, you’d owe more than $360 in interest over the course of a year if you’re not making payments towards the balance. So transferring is a pretty clear win—as long as you’re able to pay off the balance before a higher interest rate kicks in. 

Another heads-up: Don’t forget that the low- or no-fee APR that card issuers offer for transfers is often temporary. Once the promotional period ends, your interest rate could go up quite a bit.

How Can I Get the Best Deal on a Balance Transfer?

Compare a few different cards on the following terms: fees, introductory APR, length of the promotion, amount you can transfer, APR on new purchases and post-promotion interest rate. 

When scouting around for offers, keep in mind that credit score plays a key role in which deals you’re eligible for. Someone with excellent credit can probably snag a card with a rock bottom or zero APR that lasts a longer stretch of time (like 12 to 24 months), while a poor score might incur a higher APR for a briefer promotional period. (On that note, if you do opt for a balance transfer card, don’t close your old account. Longevity is an important component of how your credit score is determined.) 

Then, make sure you have a solid plan to pay off your outstanding balance. Take an honest look at how you landed in debt in the first place, and come up with actionable strategies for climbing your way out—and buffering yourself from falling back into it. 

Ideally, you want to zap your debt—or at least make a sizeable dent in it—before the introductory rate expires. Use that deadline as motivation to fuel your progress. Put reminders in your calendar to mark when the balance transfer needs to be completed and the date the promotion ends. 

You might be tempted to slack on payments since you’re no longer racking up sky-high interest, but stick with it. After all, those penalties kick in again eventually; the faster you chip away at it, the less you’ll pay in the long run.