What Is a Balance Transfer Credit Card and How Does It Work?

Highlights:

• A balance transfer credit card moves your outstanding debt from one or more credit cards onto a new card, typically with a lower interest rate.
• Many balance transfer credit cards feature a low or 0% introductory APR, allowing you to save money on interest payments.
• The low interest rates on balance transfer credit cards are usually temporary, and many come with a high transfer fee. So, balance transfer credit cards may not be right for every borrower.

If you're struggling to manage your debt, a balance transfer credit card could be one solution for you. Under the right circumstances, balance transfer credit cards may help you save money on interest payments. They can also simplify your repayment process and help you pay down debt faster than you'd be able to otherwise.

However, balance transfer credit cards aren't right for every borrower, so it's important to learn more about what they are and how they work.

What is a balance transfer credit card?

A balance transfer credit card moves your outstanding debt from one or more credit cards onto a new card, typically with a lower interest rate. Your total amount of debt remains the same. However, many balance transfer credit cards feature a low or 0% introductory annual percentage rate (APR), allowing you to save money on interest payments.

For this reason, balance transfers are often used by borrowers struggling with high-interest credit card debt. A lower interest rate may, in turn, allow you to pay down your debt faster than you could otherwise.

If your debt is spread across multiple accounts, a balance transfer can also make your credit card payments more efficient. Once you consolidate your debt onto a single card, you'll no longer need to keep up with multiple minimum payments, due dates, terms, and fees.

Pros and cons of balance transfer credit cards

Balance transfer credit cards can help some borrowers get a handle on high-interest debt. However, opening any credit card — even for debt management purposes — may come with certain risks.

Pros

• Frequently lowers interest payments. Many balance transfer credit cards have introductory interest rates as low as 0%. Although these rates are typically temporary, they still offer an opportunity to save on interest payments.
• May accelerate debt repayment. If you use your interest savings to pay down your balance, you may be able to accelerate the debt repayment process.
• Has the potential to raise your credit scores. When used responsibly, a balance transfer credit card can have a positive impact on your credit scores. For example, you may be able to reduce your total debt and improve your credit utilization ratio, both of which contribute favorably to your credit scores.

Cons

• Often requires high credit scores. You likely won't be eligible for the most competitive interest rates on your balance transfer credit card without good credit scores. If you aren't able to secure a low interest rate, the overall cost of the card may outpace your anticipated savings.
• May include expensive transfer fees. Many balance transfer credit cards charge a fee of between 3% and 5% of the amount you transfer. In some cases, these fees can nullify your potential savings.
• Low interest rates are generally temporary. Low interest rates on balance transfer credit cards may help you catch up on debt payments, but these APRs don't usually last forever. If you're unable to pay down your debt before the introductory rate expires, you may face steep interest charges that can eat into your anticipated savings.
• May temporarily damage your credit scores. Applying for a balance transfer credit card will likely trigger a formal credit check known as a hard inquiry. Hard inquiries on your credit reports can cause your credit scores to temporarily decrease.

If you're considering a balance transfer credit card, compare your options carefully, as the terms for each card may differ. For instance, while some balance transfer credit cards may have longer introductory APR periods, others may offer shorter introductory periods but waive pricey transfer fees.

If you decide a balance transfer credit card is right for your situation, read the terms of your new card carefully and aim to pay down as much debt as possible before the introductory interest rate expires. These and other responsible credit habits can help you get a better handle on your debt.