How to Use a Balance Transfer to Eliminate Credit Card Debt

Credit cards are a dual-edged sword. When used responsibly, they offer great rewards, warranty extensions, and fraud protection. These benefits are offered to entice unsuspecting consumers into carrying a debt balance and paying double-digit interest rates – often north of 15%.

Luckily, credit card issuers love to compete for your business. Many offer a 0% introductory interest rate when you transfer your credit card debt from another bank – something known as a balance transfer.

What is a Balance Transfer?

A balance transfer occurs when you apply for a new credit card and transfer your existing debt to the new account (to obtain a lower interest rate).

The balance transfer can be initiated during the credit card signup process. When you select a balance-transfer credit card and begin completing the application, there is usually a section that asks if you are interested in a balance transfer where you can input your existing account information. If approved for the new credit card, the issuing bank will automatically contact the existing creditor and handle the debt transfer. When completed, your previous creditor will be repaid and you will be indebted to the new card issuer at a lower interest rate.

If you have several different existing debts, you can transfer as many as you want, subject to the maximum credit limit on your new account. For example, if you are approved for a $5,000 credit limit on a new credit card, you can transfer up to $5,000 of existing debt to the new account. Typically (not always), you’ll have to pay a balance transfer fee of approximately 3% for each transfer initiated, but the new account will offer 6-24 months of 0% interest.

The 0% interest will slow the growth of your debt balance, allowing you to eliminate your credit card debt sooner while minimizing the amount of interest paid. A balance transfer can also help simplify your payments by consolidating your various existing debts into one new line of credit.

When Does a Balance Transfer Make Sense?

Before deciding on a balance transfer, consider the following factors:

Your credit score  

A balance transfer requires that you sign up for a new credit card. To be approved, you’ll need a minimum credit score of approximately 675, and some card issuers will prefer a score above 700.

Even if you are approved for the new card, you may not be approved for a big enough credit limit to cover all of your debts. If that happens, you can transfer the maximum amount allowed, pay it off, and then apply for another balance transfer.

Spending discipline

If approved for the balance-transfer card, you now have more available credit. If you cannot resist the urge to spend this newly found credit, you will end up digging yourself into a deeper debt hole.

Furthermore, your minimum monthly payment will go down because of the reduced interest rate. If you don’t have the discipline to pay more than the minimum amount due, you will not accelerate your debt repayment schedule.

The entire point of playing the balance transfer game is to get out of debt, which requires spending discipline and commitment.

The timing of your debt

Most credit cards charge a 3% balance transfer fee when you transfer your existing debt to the new card (one exception is the Barclay Ring). If you have multiple existing debts, each transfer would incur the 3% fee.

If you can pay off your original debt in a few months, paying the transfer fee might not make sense. To illustrate, let’s consider a few examples using a free online calculator.

Suppose you have $2,000 of existing credit card debt at 18% interest. A balance transfer fee of 3% means that you would pay $60 upfront to transfer the debt. If you make $500 monthly payments instead of doing the balance transfer, you will pay about $78 in interest and eliminate the debt in the fifth month. The $18 difference isn’t enough to worry about, so I would not initiate a balance transfer.

With that said, balance transfers are almost always the best solution for larger debt balances. Let’s assume that you have $5,000 of existing debt at 18% interest. If you can afford $250 monthly payments, it will take 24 months to eliminate the debt, and you will incur roughly $1,000 in interest.

If you transfer the balance to a credit card offering 0% interest for 21 months, you can eliminate the debt in 20 months using the same $250 monthly payment. Even assuming $150 (3%) in balance transfer fees, you can realize roughly $850 in savings by initiating the balance transfer. If approved for a credit card that charges no transfer fees, you can realize even larger savings.

If you decide to proceed with the balance transfer, there is another concern. At the end of the 0% promotional period, the interest rate will increase dramatically, leaving you in the same situation as before. You can make another balance transfer at that time, but you might have to pay another balance transfer fee.

What you don’t want to do is become a balance-transfer churner, hopping from one credit card to another without ever eliminating your debt.

Final Thoughts on Balance Transfers

Using a balance transfer can help you eliminate your existing credit card debt, but there are important caveats.

  1. You must have a sufficient FICO score to be approved for any balance-transfer credit card.
  2. You need spending discipline to prevent yourself from acquiring more debt on the new credit card.
  3. You should calculate the expected interest savings and decide if the timing is right for your situation.

If you check all of these boxes, balance transfers are hard to beat.