4 questions to answer before you transfer your credit card debt
Here's how to tell if it's the right money move for you.
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If your credit card debt is climbing, you’re in good company. The national average balance recently hit $6,200, and APRs are hovering around 15%. With those terms, you could be paying hundreds of dollars a year in interest.
A balance transfer can be a cheap way to pay down debt. This strategy involves moving debt from one credit card to another, typically with a 0% interest rate for a specified period of time, usually anywhere from 12 to 18 months.
Like most financial moves, there are benefits and drawbacks to consider. Here’s how a balance transfer works, and how to tell whether it makes sense for you.
How does a balance transfer work?
If you don’t have a balance transfer credit card yet, you’ll need to apply for one. We’ve done some research for you, with several top picks to consider. When exploring options, keep these tips in mind:
- Most card issuers won’t let you transfer a balance to another card within its network, so you’ll have to look for one with another issuer.
- If you’re looking to save money, the card should come with a long 0% introductory period and little to no fees.
- You’ll need a credit limit that’s high enough to transfer your balance. Sometimes you won’t find out your credit line until you open the account, unfortunately. But try calling the issuer to ask whether they can provide an estimate.
- If you want to keep the card around after you pay down the balance, then a low regular APR and a good rewards program are nice bonuses.
Once the card issuer approves your application, you’ll know your credit limit and how much you can transfer. You may need to call the card issuer or submit a request through your online account to complete the transaction.
And be sure to read your card agreement: The fine print often states you need to do this within the first few months to avoid fees. Once the transfer is complete, you’ll make payments to your new credit card issuer.
What should you consider before making the move?
While a balance transfer can be the right move every now and then, you don’t want to make it a habit. Perpetually opening up cards to transfer balances may hurt your credit and cost you money in fees. Instead of paying off debt, you’re kicking the can down the road. Before you get started, consider these pros and cons:
On the plus side...
- Intro APRs are usually low. Many balance transfer credit cards offer a 0% intro APR for a set time frame, typically 12 to 18 months. This can help you save money as you pay down debt.
- You can transfer different types of debt. Along with credit card balances, you may also be able to transfer personal loans, auto loans, and other types of high-interest debts to a credit card. If you’re looking to do this, check the card’s terms or call customer service to double-check.
- A balance transfer can help you consolidate debt. Streamlining your debt under one interest rate and one monthly payment may help you better organize your payments and pay on time. There’s no need to keep track of multiple accounts and due dates.
On the other hand...
- Fees are usually unavoidable. Most balance transfer credit cards come with a fee based on a percentage of the balance you’re transferring. They typically range from 3% to 5%. So if you transfer a $2,000 balance to a credit card that charges a 3% fee, then it will cost you $60 to complete the transfer. This is added to your new balance and increases your debt, but sometimes the math makes sense. More on that below.
- The intro period eventually expires. Those introductory rates don’t last forever. After a certain amount of time, usually 12 to 18 months, the annual percentage rate (APR) on the credit card increases to its regular rate. Any balance you haven’t paid off will incur interest charges at that new APR. You should be reasonably sure you’ll be able to pay off your entire balance in that time frame.
- A balance transfer may affect your credit. A balance transfer can create a hard inquiry on your credit reports, and opening a new card can lower the average age of your accounts, which may temporarily ding your credit scores. It can also have both positive and negative impacts to your utilization ratio. But if you follow your debt repayment plan, your score should eventually rebound.
When might a balance transfer be the right move?
To make a final decision, figure out the answers to these four questions:
1. How much interest will you save?
Crunch the numbers to see if you save money by transferring the balance. Let’s say you have $5,000 on one credit card with an interest rate of 15%. If you leave the debt on this card and pay it off within 18 months, then you’d pay $614 in interest. But if you transfer the balance to a 0% APR card with an 18-month intro period—and pay it down within that time frame—you’d pay no interest at all.
2. What fees will you pay?
These eat into the interest you save but could still be worth the cost. If your new credit card charges a 3% fee, then you pay $150 to transfer the $5,000 balance. Subtract that fee from the interest you'll avoid, and you’re still ahead by $464.
3. Can you pay off the balance in time?
Erasing the debt within the introductory period helps you avoid interest. With a $5,000 balance and 18-month introductory period, you’d need to put $278 a month toward the balance. Check your budget to see if there’s room for this payment. And while you’re paying off the balance, avoid using the card for new purchases. Running up new debt could cancel out any progress you make on your old debt.
If you miss the 18-month deadline, you’ll pay interest on any balance that remains—which further eats into your savings. Let’s say you paid off half the balance within 18 months. At that point, the credit card’s APR increases to 20%. The remaining $2,500 would cost you $147 in interest if you pay it down within the next six months. Coupled with the balance transfer fee you paid, you only save $317 total on the balance transfer.
4. How will your credit be impacted?
A balance transfer can influence three of the five factors that determine your credit scores:
- New credit: Opening a new credit card creates a hard inquiry on your credit reports. These inquiries typically remain on your credit reports for up to two years and may temporarily lower your credit scores.
- Credit age: Once you open the card, the average age of your accounts will drop. This, too, can lower your credit scores.
- Credit utilization: The credit utilization ratio will increase on the new card where you transferred the balance. This may lower your credit scores. However, your overall credit utilization ratio may drop because you have more available credit. This usually has a positive effect.
Although you should consider the impact to your credit before transferring a balance, it’s more important to keep up good habits while you pay down the balance transfer. That means making on-time payments each month and not running up more debt.
What are some alternatives to look into?
A balance transfer can help you get out of debt, but they’re not your only option. Depending on your situation, you might not save much on interest when you factor in the fee. Or your new credit line might not be high enough to transfer the entire balance. If that’s the case, here are two alternatives to check out:
You can pay off your credit card debt with a personal loan, which is a lump sum of money that you pay back in equal monthly installments, usually over a course of two to five years. Loan amounts generally range from $500 to $25,000 or more, and while APRs can reach up to 36%, they can also be as low as 3.5%, significantly lower than the average APR with credit cards. Keep in mind, the best rates typically go to borrowers with strong credit.
Debt management plans
A debt management plan is an agreement you and your credit card issuer can make to adjust the terms of your outstanding debt. While you can call the issuer and try to negotiate a lower APR or arrange another type of plan, credit counselors typically have more expertise in this area. This option might be best if you’re struggling with several cards or other types of debt. The National Foundation for Credit Counseling can connect you with a counselor in your area.