What is a balance transfer, and does it impact your credit score?

( NewsNation ) — Americans owe a record $1.14 trillion on their credit cards, and carrying debt has become more expensive , but a refinancing method known as a balance transfer could help ease the pain.

A recent TransUnion report found that the average credit card balance is now $6,329 — up 30% from 2021. As credit card balances have grown, so has the cost of paying off that debt. Credit card interest rates are at their highest level in decades , rising from 15% in May 2022 to nearly 22% in August.

A refinancing technique known as a balance transfer may make sense for some. Balance transfers allow you to move debt from a high-interest credit card to a card with a lower interest rate, usually for a fee.

Here’s what to know.

What is a balance transfer?

A balance transfer is exactly what it sounds like: you’re transferring existing debt from one credit card to a different card, usually to take advantage of a lower rate.

Like other types of credit cards, you’ll have to get approved for a balance transfer card by filling out an application so the issuer can determine your creditworthiness.

The main appeal of a balance transfer is that credit card companies often offer a 0% annual percentage rate (APR), meaning you can pay off your balance without accruing additional interest.

Typically, that interest-free rate is only for a limited time. After the introductory period ends, the 0% rate goes away, and you’ll start accruing interest on your outstanding debt.

The logic goes like this:

1. Consolidate your debt at a much lower rate
2. Aggressively pay down your balance during the 0% promotional period
3. Save money by paying less interest than the higher-interest card required

That seems like a good deal, but there are a few things to consider. First, there’s usually a fee when you transfer a balance, often 3% or 5% of the total balance, according to Bankrate .

To put that in perspective: For every $10,000 you move to a balance transfer credit card, you’ll pay an additional $300 or $500.

Balance transfers may also require a good credit score. After all, the card issuer is taking on existing debt, which presents a risk. According to the Consumer Financial Protection Bureau (CFPB) , 98% of balance transfer volume in 2021 and 2022 was by consumers who had a credit score of 660 or higher.

Anyone thinking about a balance transfer should pay close attention to the fine print. In most cases, new purchases on a card that carries a transferred balance do not benefit from the low interest rate grace period, the CFPB noted in its report.

Falling further behind on your payments could also bring additional consequences.

“A late payment can cause you to lose your introductory 0% APR period and result in a penalty APR that’s higher than the card’s regular rate — which can leave you in a worse financial shape than when you started,” Funto Omojola, a credit card expert at NerdWallet, said in a recent report .

Do balance transfers hurt your credit score?

A balance transfer can affect your credit score negatively or positively depending on several factors.

If you apply for several different cards, opening a balance transfer credit card can temporarily hurt your credit. That’s because applying for a credit card results in a hard inquiry, meaning a creditor looked into your credit history to determine how much risk you pose as a borrower.

One hard inquiry isn’t a big deal, but several hard checks over a short period can negatively impact your credit score in the short term because it may indicate you’re seeking credit cards that you can’t pay back.

On the other hand, balance transfers can positively affect your credit score if you open one new card and actively reduce your debt.

Chase Bank explains one reason why : “When you open a new card for the purpose of transferring a balance, you will increase the amount of credit you have available and thus lower your credit utilization ratio.”

Your credit utilization rate is a major factor in determining your credit score and a lower rate shows you’re using a smaller portion of your available credit — a sign you’re effective at managing your debt.

Your credit score could also improve if a balance transfer helps you keep up with your monthly payments since paying off your debt each month is one of the best ways to demonstrate responsible financial behavior over time.

In other cases, a balance transfer may not impact your credit score. For example, if you transfer a balance from one credit card to another existing credit card. That would eliminate the possibility of a hard inquiry on your credit report.

Are balance transfers a good idea?

Balance transfers can make sense for those who use the 0% rate to pay down their balance quickly and find a reasonable transfer fee. The CFPB laid out the math like this:

• A cardholder who transfers a $5,000 balance from a card where they were revolving the balance at a 25% APR might pay a transfer fee of 2.8%, $140 upfront.
• That cardholder would save nearly $1,250 per year in interest during the introductory period, assuming they were only making the minimum payment on the prior card and the new card has a 0% balance transfer APR.

“Depending on the duration of the promotion and the interest rate differential, as well as the consumer’s repayment behavior, savings from balance transfers can be significantly higher than the upfront cost of the initial balance transfer fee,” the CFPB wrote.

Personal finance guru Dave Ramsey has said balance transfers can be helpful in some cases but only if your behavior changes.

“It’s ok to do it as long as you know that 95% of the problem still stands there and 95% of the solution still stands there — and that be you,” Ramsey said in a 2023 video .

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