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What is a balance transfer?

Vidhu Bajaj avatar
Vidhu Bajaj
- 6 min read
What is a balance transfer?

A balance transfer allows you to move your outstanding debt to a new credit card, charging a low or 0% interest rate for a fixed period of time. This could be a helpful strategy to accelerate your debt payment without accumulating additional interest charges. Some credit cards also allow you to transfer debt from other sources, such as personal loans, providing more flexibility.  

Balance transfers can offer several benefits, including eliminating or reducing interest charges while repaying your loan. Consolidating debts from multiple cards could also simplify your payments, making budgeting and tracking your progress easier.  

However, although helpful, balance transfers are not a magical solution for resolving your outstanding debts. They come with their own risks and can't be relied upon as a quick-fix solution to repaying your debt. Even though a balance transfer may provide you with some room to repay your debt, you may face higher interest rates and penalties if you fail to clear your balance within the promotional period. 

How do balance transfers work?

A credit card balance transfer involves moving existing debt from one or more cards to a new credit card with a temporary low interest rate. This can help you reduce your interest charges while you focus on repaying your outstanding debts. 

Most balance transfer credit cards offer promotional interest rates for specified periods. They typically charge you a very low or no interest on your transferred debt during this time. This could give you a chance to get out of a tricky debt spiral by saving on interest charges. However, you must remember that the introductory low rate will only last for a limited period. 

You should aim to repay most of your transferred balance (if not all) within this time, as your low introductory rate will revert to the purchase rate once the promotional period is over. 

When may a balance transfer be worth it?

A balance transfer could be a helpful strategy for paying off your existing credit card debts by moving them to a new card with a low or 0% interest rate for a specific period.  

Credit cards are typically associated with high interest rates, which can sometimes make it challenging to repay your outstanding balance as it continues to accrue interest and grow. In such cases, transferring your balances to a new credit card with a low or no interest rate can prevent your debt from increasing (or growing as exponentially), as long as you make timely repayments and avoid new purchases. Even better, all the money you were spending on interest can now be used to repay the principal. 

While this may sound like a win-win situation, balance transfer credit cards also have their pitfalls. Some balance transfer cards may impose high fees for the initial balance transfer, and there may be limits around the amount of debt you can transfer to the new card.

It's also crucial to assess whether you can realistically pay off the transferred debt within the low- or no-interest period. Failing to do so could attract late fees and a higher interest rate on the remaining balance. 

Additionally, if you're not careful and use your balance transfer credit card to make new purchases, you'll most likely be charged a higher interest rate than the promotional rate. Therefore, limiting your spending and focusing on repaying your balance faster is essential to ensure you get the full benefit of the no-interest period

What to look out for when selecting a balance transfer credit card?

There are several key factors to keep in mind when selecting a balance transfer credit card, including:

Balance transfer rate 

The balance transfer rate is the interest rate you'll be charged on your transferred balance during the promotional period. Most balance transfer credit cards offer balance transfer rates in single digits, but you'll also find deals offering no-interest periods.  

Balance transfer fees 

Some credit card issuers may charge a one-off balance transfer fee – which is typically around 1-3% of the total amount you transfer. However, not all credit card providers charge a balance transfer fee, and it's worth comparing your options.

Annual fees

Annual fees on balance transfer credit cards could range from a few hundred dollars to absolutely nothing. Some balance transfer credit cards may advertise low or no annual fees, but this may only be valid for a limited period. Remember to read the terms and conditions closely to find out about any hidden charges or promotional rates that may increase in future.

Purchase rate 

The purchase rate on a credit card is the interest you pay on your regular purchases made using the card. It is usually higher than the balance transfer rate offered by a card issuer and generally applies to any new purchases you make using the card. The purchase rate is also the interest rate you'll pay on any outstanding balance left on your card after the promotional interest rate period expires.  

Balance transfer caps 

A balance transfer credit card could come with a transfer limit that typically depends upon your approved credit limit. While some credit card issuers may allow you to transfer funds up to your new card's full credit limit, others may cap it to a percentage of your overall credit limit.

Length of the introductory period 

A balance transfer card could help you repay your debts faster, but your success with the strategy also depends on the time you get to repay your debts. You can use a balance transfer calculator to analyse various options and estimate the timeframe required to repay your debt. If you can't clear off the transferred balance in the promotional period, you may be charged a higher interest rate and late fees.

Perks and rewards

Does your new card offer any rewards program or other perks, like travel insurance, once you’ve paid off the transferred balance in full? If so, what is the annual fee you are paying to avail of these benefits and do they match your spending patterns and lifestyle?

Why do credit card providers offer balance transfers?

Credit card providers use balance transfers as a way to win new customers. Even though a balance transfer might cost them money in the short term, they expect to more than make back their money in the long term.

How? Well, some people don't change their spending and saving habits, so, after a temporary reprieve during the honeymoon period, they end up paying the same interest to a different organisation. But you could beat the card providers at their own game by using a balance transfer smartly. The key is to make the most of the low or 0% interest rate offered during the introductory period

Consider developing a solid repayment plan for this period by calculating how much you need to repay each month to clear your debt before the revert rate kicks in. Stick to your plan and try paying down your debt aggressively within this period to avoid paying any penalties or higher interest rates. You may also want to cancel, cut up or hide your old credit card to avoid swiping it for more purchases.


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Product database updated 16 Jun, 2024

This article was reviewed by Personal Finance Editor Peter Terlato before it was published as part of RateCity's Fact Check process.