If you’re looking to get rid of debt you owe on credit cards or personal loans, a balance transfer could help you pay down your debt while potentially avoiding or reducing your interest charges. But it’s important to start with a plan.
Read more: How to keep expenses on track with spending buckets
What is a balance transfer?
A balance transfer is the process of moving an existing debt from one account to another, typically from a high-interest credit card to a different credit card with a low (or even 0%) annual percentage rate (APR) introductory or promotional period.
How balance transfers work
Balance transfers can be a great way to expedite paying off your credit card debt, but you should understand the steps before initiating moving your debt.
1. Apply for a new balance transfer credit card or check if your current card issuer offers balance transfers
Research what balance transfer cards are available to you. To identify your best option, first you should note each card’s introductory interest rate and timeframe, keeping in mind that the interest rate after that time will likely increase. Once you’ve identified a card that works for you, submit an application for approval.
Note: Applying for a new card will result in a hard credit check, which could temporarily reduce your credit score.
2. Choose an amount to transfer
It might seem intuitive to move as much of your debt as possible from various accounts, but it’s important to think about:
How any balance transfer fee will affect your overall balance
Whether you’ll be able to pay off your balance within the introductory APR period
The interest rate you’ll be charged after the initial low-interest period
Prioritizing accounts with the highest APR
With these factors in mind, create a debt plan for how much of your debt you’ll transfer.
3. Request a balance transfer
You may be able to request a transfer online or over the phone with your balance transfer card’s provider. Know the amount you would like to move and your current lender.
4. Pay off your balance
Stick to your plan and make all of your payments on time. Tools like Ally Bank’s spending and savings buckets can help you manage where your money is going and stay on track with debt payments.
Balance transfers can be a great way to reduce high-interest payments if you’re ready to aggressively pay down your debt.
Pros and cons of a balance transfer
A balance transfer can be a useful financial strategy, but it can also come with some downsides.
Pros
Benefits of a balance transfer could include:
Paying less interest and saving money with a low or 0% introductory APR
Easier debt management by consolidating multiple balances into a single credit card account
Lower interest charges to help reduce interest debt faster
Cons
Potential drawbacks of a balance transfer include:
Most balance transfers come with a fee, which can reduce immediate savings
If you don’t pay off the balance before the introductory APR promotion ends, regular interest rates can increase significantly
New purchases may not be covered by the introductory rate and could accrue interest at the higher rate immediately
Opening a new credit card may briefly impact your credit score and show on your credit report
How to choose the right balance transfer offer
When researching cards, consider the following:
Compare rates and fees: Look at the length of the intro APR, the balance transfer fee, the ongoing APR and any annual fee.
Check eligibility: Certain balance transfer offers require a good or excellent credit score.
Weigh rewards trade-offs: Some cards with cash back or rewards can limit or exclude rewards on balance transfers; understand all the terms before you move a rewards balance.
Read the fine print: Pay attention to whether new purchases will incur interest during the promo period.
How to calculate if a balance transfer will save you money
Compare the upfront balance transfer fee to the interest you are currently paying. A balance transfer could make financial sense if the upfront fee is smaller than the total interest you would otherwise pay over the same time frame.
You can use our credit card payoff calculator to see how long it will take to pay off your balance. Alternatives to balance transfers A balance transfer isn’t the only way to pay down debt. Other options include:
Personal loan: A fixed-rate personal loan may offer predictable monthly payments.
Debt snowball or avalanche methods: These budgeting strategies focus on paying extra toward small balances or highest interest balances without opening a new credit card.
Work with a credit counselor: Nonprofits can help you create a plan that may include consolidation but potentially avoid a new line of credit.
Is a balance transfer right for you?
Balance transfers can be a great way to avoid high-interest payments if you’re ready to proactively pay down your debt. But if you’re unable to focus on repayment, it might be best to wait. Balance transfer cards can have even higher interest rates than other credit cards after the introductory period, so you should only use one once you’re ready.
