How Does a Balance Transfer Work?


Thanks to that credit card balance transfer, you save $971, even with the balance transfer fee. You’ve paid off your debt three months earlier, and because you consolidated your debt, you only needed to make one monthly payment instead of three.

Balance transfers vs. personal loans

A personal loan is a common alternative to a balance transfer. If you get a personal loan, you can use that to pay off your debt, and then make payments on the loan.

The biggest disadvantage of a personal loan is the interest rate. Although you can likely find a personal loan with a lower interest rate than your credit card debt, you won’t get a 0% intro APR.

On the other hand, you can typically get a personal loan with a term of three to five years. That’s much longer than the 0% intro APR period on any balance transfer card. Personal loans can also be used to pay almost any type of debt. Unless you have balance transfer checks, a balance transfer card can only be used for credit card debt.

In most cases, it’s smarter to start with a balance transfer card and pay down as much debt as you can during the intro period. If you still have debt afterwards, you can apply for a personal loan. This method gets you the best of both worlds. You take advantage of that 0% intro APR, and then you’ll have a much smaller amount left to pay off with a personal loan.

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Balance transfers vs. 401(k) loans

If you have a 401(k), you may also be considering a 401(k) loan to pay off your credit card debt. This type of loan allows you to use money from your 401(k) and avoid early withdrawal penalties. You repay this type of loan through automatic deductions from your paycheck, and you can typically get a term of up to five years.

Although that might sound convenient, you should only tap into retirement savings as a last resort. Balance transfers are the much better choice for several reasons:

  • By borrowing money from your retirement fund, you could miss out on growth, especially if the market is going up.
  • If you lose your job, your 401(k) plan will likely require that you pay back the entire loan quickly. Otherwise, the loan will be considered an early retirement plan distribution, resulting in taxes and penalties.
  • It’s also considered an early retirement plan distribution if you don’t pay the loan off by the end of the term, and the longest term in most cases is five years. Again, you’d pay taxes and penalties.
  • In a worst-case scenario where you eventually need to declare bankruptcy, credit card debt is dischargeable, but a 401(k) loan isn’t.

The only situation when a 401(k) loan would be the right choice is if you don’t have the credit to get a balance transfer card, because your credit score won’t matter for a 401(k) loan.

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Should I do a balance transfer?

If you have credit card debt and a good credit score, a balance transfer could be a great way to save money on interest.

Some financial decisions are difficult, but this isn’t one of them. Credit card interest rates make debt much harder to repay. Balance transfers give you an interest-free opportunity to pay back what you owe.

You should review your credit score first to make sure you’ll qualify for a balance transfer. If you haven’t done this before, there are quite a few free ways to get your credit score online. A FICO® Score of at least 670 is recommended to qualify for a balance transfer card.

What should I do with my old card after a balance transfer?

After a balance transfer, the best approach is to stop using your old credit card. You may even want to keep it locked away at home so that you’re not tempted to buy anything with it. If you keep making new purchases with that card, you could fall into the same bad spending habits as before and end up with even more credit card debt.

You may be wondering if you should just cancel the old card, given that you won’t be using it. This can cause your credit score to drop, because your credit utilization will increase when you cancel the card and lose a portion of your available credit. Unless the card has an annual fee or you’re worried you’ll continue using it, you’re likely better off keeping it open.

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Making the most of a balance transfer

If you’ve decided to go through with a balance transfer, remember that it only works when you fully commit to paying off what you owe. It’s also crucial that you always pay on time. A missed payment could result in a late fee and possibly even the cancellation of your card’s 0% intro APR.

It’s easy to relax and spend more than you should once your credit card debt isn’t racking up interest anymore. But that just leaves you with the same problems that you had in the first place — or even bigger ones as you’ll have even more high-interest debt to deal with.

That intro APR won’t last forever, so make sure you pay back as much debt as you can before it ends.

Take the next step

If you have credit card debt, a balance transfer could be a useful way to help you save money on interest and fees as you take control of your debt.

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