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How a balance transfer card can save you hundreds of dollars
Here are some guidelines on how to complete a balance transfer, best practices to follow and common terms you should familiarize yourself with prior to transferring debt.
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Balance transfers are a smart way to pay off debt without incurring interest. You can transfer existing credit card debt to a balance transfer card that offers no interest for up to 21 months and benefit from paying off your debt faster and at a lower cost. (See our round-up of the best balance transfer cards.)
Completing a balance transfer is relatively easy and can save you hundreds of dollars on interest — as long as you prioritize paying off this debt in a timely manner.
Before you jump on a balance transfer offer, it's important to consider the terms associated with the promotion and how it will work into your budget.
Below, CNBC Select explains how to complete a balance transfer, some best practices to follow and common terms you should familiarize yourself with prior to transferring debt.
How balance transfers work
When you make a balance transfer, you move debt from one credit card to a new card that offers a low or 0% introductory interest rate period, which usually lasts six to 21 months. During this period, you won't incur interest charges and can benefit from your payments going entirely toward your principal balance.
The average balance Americans carry on their credit cards in 2019 is $6,194, according to Experian. To find out how much the average American can save with a balance transfer, we used a Bankrate calculator to tally the interest rates and fees you could incur if you transferred debt to an intro 0% APR card.
We assumed a $6,194 credit card balance and $200 monthly payments. With a typical credit card, the average consumer would spend $2,012 in additional interest, assuming the average 16.97% APR, according to the Fed. And it would take 42 months — more than three years — to pay off that debt.
But if you take full advantage of a credit card's intro APR period for balance transfers and pay $200 per month, you'd pay less than $500 in interest and cut your repayment time to roughly 33 months.
How do payments work when you make new purchases on a balance transfer card
While a balance transfer card can be a great asset, things can get a bit complicated when you use the card for new purchases and the intro 0% APR offer only applies to balance transfers. Some balance transfer cards only offer introductory 0% APRs on transferred debt, meaning new purchases will incur the standard purchase APR.
If you only make the minimum payment on your balance transfer credit card, the money will go toward the balance with the lowest interest rate — i.e. the balance you transferred to the card. Any payment above the minimum will then go toward the balance with the highest APR — new purchases.
Let's take an example where you transferred debt to a new card with an intro 0% APR on balance transfers only and a $25 minimum payment. If you spend $400 on new purchases and make a payment, the first $25 goes toward the balance you transferred, not the balance you just incurred from making new purchases.
If you want to pay off what you borrowed that month in full and avoid interest altogether, you'd need to pay off the amount you spent plus the minimum payment, so $425. Any additional payment would then go toward the balance with no interest that you transferred. So if you paid $500, $400 would go toward the balance from new purchases and the remaining $100 would go toward transferred debt.
How to complete a balance transfer
Balance transfers can be completed in a few simple steps. The process varies a bit by card issuer, but is generally the same. The simplest way to complete a balance transfer is online. You can also complete a transfer over the phone by calling the number on the back of your card.
Here's how to complete a balance transfer online:
- Log into your account and select your balance transfer offer.
- Review the terms of your offer (length of the intro APR period, regular purchase APR and any balance transfer fees).
- Fill out the form with the details of your transfer: credit card account number for the card with debt and the amount you want to transfer.
- Verify the information you entered is correct, then submit the transfer.
Balance transfer best practices
- Check your credit score before applying. Most balance transfer cards are reserved for people with good or excellent credit (though we found one card that may accept fair credit). You should check your credit score to see if you may qualify for a balance transfer card before you begin the application process.
- Transfer balances to a card from a different issuer. Balance transfers can't be done between cards from the same issuer. For example, you can't transfer debt from one Citi card to another Citi card.
- Request a balance transfer as soon as possible. Many cards set time limits on when you can complete a transfer, often within 60 days from the date your account is opened. If you miss this window, you may miss out on the intro APR period. Also, the intro APR period begins when you open the card, not when you make the transfer, so it's best to make the transfer as soon as possible so you can maximize the intro period.
- Review the balance transfer limits. Card issuers often limit the amount of debt you can transfer to a percentage of your credit limit or a specific dollar amount. For example, terms for the Chase Slate® Credit Card state: "The total amount of your request(s) including fees and interest charges cannot exceed your available credit or $15,000, whichever is lower." If you have a $10,000 credit limit, the max you can transfer is $10,000. (Learn more: What happens if you're denied for a balance transfer card or can't transfer all your debt.)
- Do the math to see if a balance transfer fee is worthwhile. Balance transfer cards often come with a balance transfer fee. The fee can be worth the amount you save on interest, but you should do the math to make sure. There are many free calculators, such as this one from Bankrate, available to tell you how much you can save with a given card.
- Continue to make minimum payments. While you're benefiting from an introductory 0% APR period, you're still required to make minimum monthly payments toward your balance. If you miss a payment, you may risk losing out on the intro offer.
Common balance transfer terms
There can be a lot of jargon to consider when navigating a balance transfer. Here are a few terms to know.
- Balance transfer fee: Most balance transfer cards charge a fee, ranging from 3% to 5%, when you transfer a balance. The fee is often outweighed by the benefits of completing a balance transfer, though there are cards that don't charge balance transfer fees and allow you to maximize savings.
- Intro APR period: The special financing period that provides a low or 0% interest rate for a predetermined amount of time. During this period, you can benefit from carrying a balance with no or minimal interest charges. The intro APR period may only apply to balance transfers or to both balance transfers and new purchases. The length of the intro period may be different for balance transfers and purchases.
- Regular APR: This is the interest rate that you'll incur once the intro period ends. And, if there's no intro APR period on purchases, any new transactions will incur this interest rate.
- Deferred interest: Some balance transfer cards have fine print that states there are no interest charges if you pay your balance in full before the end of the intro period. But if you carry a balance after the intro period, you may be responsible for all the interest accrued during the intro period. This can be an unexpected surprise if you weren't aware of the terms. Deferred interest is rare among major card issuers, but it s something you should check for before choosing a balance transfer card.
Information about the Chase Slate® Credit Card has been collected independently by CNBC and has not been reviewed or provided by the issuer of the cards prior to publication.