In our previous article, we introduced credit card Cash Advance, which is a relatively uncommon use of a credit card. Most people generally want to avoid Cash Advance fees and interest. Today, however, we’re going to cover a more practical advanced feature: Balance Transfer. For people who are short on cash or looking to pull out funds, this method can provide a certain amount of usable cash in the short term. If you choose the right credit card, you may even be able to get an interest-free loan for more than 1 year.
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What Is a Balance Transfer?
A credit card Balance Transfer (BT) generally refers to transferring money from one credit card (the first account) to another credit card, loan, or bank account (the receiving account), so that the balance owed on the receiving account is moved onto the first card. There are two main reasons people do this:
- The APR on the first account is lower than the APR on the second, so a BT reduces interest costs
- All debt is moved onto the first account, making it easier to manage after the BT
From the bank’s perspective, a BT is basically the bank paying off what you owe elsewhere and moving that debt onto its own product. Banks usually use a low introductory APR (intro APR) to entice you to do a BT.
Balance Transfer Fees
A BT is not free. In general, a BT comes with two types of costs: a fee of around 2-3% and the interest charged after the BT (APR). The fee usually cannot be avoided, so we generally only use BT when a credit card offers 0 APR for balance transfers (credit cards usually have three kinds of APR: purchase APR, BT APR, and CA APR). In that case, you are essentially paying a 3% fee in exchange for an interest-free loan. In the articles that follow, we will focus on 0 APR BT situations.
Balance Transfer Limits
Credit card BT is very similar to Cash Advance (CA) in that both come with certain fees and APR. However, the CA limit is usually small (about one-fifth of your total credit limit), while the BT limit is often the same as your current available credit. So, a card with a $10,000 credit limit may have only a $2,000 CA limit but a $10,000 BT limit (some banks may also impose a short-term cap on BT). If you need cash, you should choose CA; if you need to pay off a credit card or other loan, you should choose BT.
Common 0 APR Balance Transfer Offers
0 APR After Opening a Card
Many credit cards come with a 0 APR BT offer after opening the card. Common examples include:
- Chase Freedom (0 APR on BT for 15 months after opening the card)
- AMEX Everyday Card (0 APR on BT for 15 months after opening the card; you must apply within 30 days)
However, note that some credit cards require you to request the BT within 30-60 days of opening the card in order to get the 0 APR. So if you plan to do a BT, it’s best to read the terms carefully when applying or confirm with customer service. The last step of a credit card application often includes a place where you can enter your BT information, and you can fill it out right away so you don’t miss the new-card BT offer.
When filling out a BT request, you only need to enter the credit card that will receive the payment and the amount you want to transfer. For example, here is Chase’s interface:
It says transfer from because the balance is being moved from another card to the Chase card, while the money is effectively being paid by Chase to your other card.
Targeted 0 APR BT Offers from Credit Card Issuers
After using a credit card for a while, many people receive blank checks in the mail from their credit card company. At first, I didn’t really know what these checks were for either. A closer look revealed that these checks can be used for BT. These checks are usually accompanied by a 0 APR BT offer from the bank. They’re simple to use: just fill in the amount you want to transfer and deposit the check directly into your checking account. Of course, you should carefully review the BT fee, which is generally around 2%-3%.
In general, after receiving this offer, you can also log in to your credit card account and find the 0 APR offer there. So you can complete it online as well. Below is a 0 APR offer from my Citi credit card.
When to Use These Offers
If you have a 0 APR offer, is it worth paying a 3% fee to do a BT? In my opinion, if you need a small loan but don’t want to go through the bank loan application process, these 0 APR offers can be very useful. If your 0 APR period lasts 18 months, then even after including the 3% fee, your average annual interest rate is only about 2%, which is lower than many bank loans. There is also a more extreme case: if you use money obtained through a BT to invest in something earning more than 5% annually, then a BT can also be worth considering.
Repaying a Balance Transfer
After reading the explanation above, you might think that using a 0 APR credit card for a BT to get an interest-free loan for a 2-3% fee is a great deal. However, if you do a 0 APR BT, you must pay attention to the following points:
- You must pay the minimum due every month
- It’s best not to make new purchases on the credit card after doing a BT
- Pay off the entire balance by the statement before the 0 APR BT period ends
Pay the Minimum Due Every Month
This is the most important point. If you fail to pay the minimum due required by the bank, the bank can cancel your 0 APR eligibility at any time. It may also raise the APR on your BT. If you then cannot repay the BT balance, an APR of 25%-30% is basically loan-shark-level expensive. So no matter what, make sure you pay the minimum due. Usually the minimum due is around $25-$35, so unless you simply forget, it should generally still be manageable.
Repayment of New Purchases After a Balance Transfer
My suggestion is that once you use a card for BT, don’t use that card for purchases at all—just cut up the card and faithfully pay the minimum due each month. If you’re not interested in the reason, you can skip the explanation below.
First, new purchases made after a BT do not have a Grace Period (because your statement balance remains >0 during the BT period). So interest on new purchases starts accruing immediately from the posting date, using the Purchase APR. Therefore, if you have a 0 APR BT offer but not a 0 purchase APR, that’s bad news. Second, if the APR on new purchases is not 0, repayment becomes very complicated. You can’t just pay the minimum due; you need to pay off the new purchase amount right away. If you do not pay it off immediately, then after the statement closes, the amount you need to pay is: minimum due + the full amount of the new purchase + the interest generated by that new purchase. Only then can you ensure that the new purchase is fully paid off and does not continue compounding interest. Here’s why:
- At most banks, payments equal to the minimum due are applied to the lowest APR balance first. In this situation, your BT APR is the lowest (0), so your payment only goes toward the BT balance. Therefore, if you pay only the minimum, your new purchases have not actually been paid off and will continue accruing interest at the Purchase APR. Any payment above the minimum is applied to the highest APR balance. In this case, your highest APR is the purchase APR (>0), so that extra payment must cover the full amount of the new purchases plus the interest they generated.
In short, remember this: it’s best not to use a card for purchases after doing a BT; if you do make a purchase, it’s best to immediately pay the minimum due + the full amount of the new purchase + the interest.
Pay Off the Balance Before the 0 APR BT Period Ends
The expiration date for this kind of 0 APR offer is generally different from your statement closing date. So if the 0 APR period ends and you still have not paid off the full balance, interest starts accruing immediately (it just won’t appear until the statement is issued). And that interest can be brutal: the amount subject to interest is your remaining balance, and the interest period is counted from the first day of your BT through the expiration date. For example, if you still have $1,000 unpaid and the regular BT APR is 20%, then you would owe an extra $400. Therefore,
- make sure you completely pay off the balance before the 0 APR offer expires
Best Credit Cards for Balance Transfers
The best credit card for Balance Transfer is of course the Chase Slate. Its main features are:
- If you use BT within 60 days of opening the card, there is no fee
- 0 APR on BT for 15 months after opening the card
- 0 APR on purchases for 15 months after opening the card
This combination of 0 fee + 0 APR truly gives you a free 15-month interest-free loan.
If you want an even longer interest-free period, the Citi Simplicity card is also a good option. Its main features are:
- 0 APR on BT for 21 months after opening the card (if used within four months)
- 3% BT fee
Compared with Chase Slate, it adds a 3% fee, but in exchange you get 6 more months of interest-free time, which is still pretty good.
Summary
In addition to lucrative welcome bonuses and everyday cash back, using Balance Transfers to access short-term cash flow is another way people make use of credit cards. Of course, you need to watch out for high fees and make payments on time.