Balance transfers can save you thousands. Here’s how (with a real-world example) (2024)

The answer is: you never would. The interest is accumulating way too fast for $50 payments to make a dent.

But what if you upped the monthly payments to $125?

At that rate, it would take you 27 years and one month. And by the time you paid off your $5,000 debt, you’d have paid an additional $35,543.53 in interest.

Examples like these are why balance transfers are so powerful. Instead of paying a Toyota Camry-worth of interest, you could move your $5,000 balance onto a card with 0% APR and pay it off in 18 months, saving $35,000+ in interest – and your credit score – along the way.

But how exactly do balance transfers work? Are there fees and hidden strings attached? And how did a single balance transfer help to save my friend’s house (and relationship)?

Read on to find out.

What is a balance transfer?

A balance transfer is when you move credit card debt from a high-interest card to a low-interest card to save money. As illustrated above, a well-timed balance transfer can save you thousands, if not tens of thousands in interest payments and help you clear your debt much faster.

To the uninitiated, a balance transfer might sound like a shady, money-saving “hack” that the credit card companies deplore—similar to how the airlines can’t stand skiplagging.

But in truth, the banks openly encourage the practice – and many have even come up with dedicated balance transfer cards of their own.

Source: Citi Diamond Preferred, via Citi.com (captured 12/14/23)

But why would the banks take on your credit card debt for free? What’s the catch?

What’s the catch to balance transfers?

There are two.

The first is that balance transfers always have fees attached. Typically it’s the greater of $5 or 3% to 5% of the transferred balance. So on our hypothetical $5,000 debt from above, our balance transfer fee would likely be between $150 and $250.

The second is that balance transfer credit cards typically require a credit score of 670 or higher to apply. We’ve seen a few that are rumored to accept scores as low as 630, but in general, a high quality balance transfer card will require good or better credit.

That’s why if you’re battling high-interest credit card debt, it’s critical to consider a balance transfer sooner than later. Once you start missing payments or your credit utilization ratio gets too high, your credit score will start to fall – and the door to apply for a balance transfer card starts to close.

That’s almost exactly what happened to my dear friend, whose last-minute balance transfer helped to save her house and her relationship. But more on that in a minute.

How does a balance transfer work?

Before we dive into my personal story, let’s put some context into place: what are the steps involved in a balance transfer?

We go into way more detail in our complete guide on How do balance transfers work, and will one work for you? But here’s a quick summary:

1. Choose and apply for a balance transfer card – Balance transfer cards are just regular credit cards with balance transfer benefits, so the application process should look and feel 100% familiar.
   
2. Initiate the transfer – Balance transfer cards typically give you three to four months from the date of account opening to initiate a transfer, so don’t delay.
   
3. Pay the transfer fee – As mentioned, the fee to conduct a balance transfer is usually the greater of $5 or 5% of the transfer amount, though some go as low as 3%.
   
4. Keep making payments on your old card – Transfers can take anywhere from a few days to a couple of weeks to go through, so be sure to continue making payments on your old card to avoid an unnecessary ding to your credit.
   
5. Confirm the old card has a $0.00 balance – When it comes to your debt and credit score, it’s best never to assume anything and to always double check. After all, an outstanding balance of $1 or $100 can equally ding your credit if you miss a payment.
   
6. Make a payoff plan – Once you’ve fully transferred your balance, keep in mind that your new card’s 0% APR period won’t last forever (the standard is 18 months but some go as high as 21 months). So if at all possible, be sure to set up a payment plan to clear your debt before regular, double-digit APR kicks in and you’re right back where you started.

Now that you’ve seen the math behind balance transfers, let’s see how a balance transfer can work in real life.

Magic spells and grease fires – a real world example of a balance transfer

Let’s call my friends John and Jane: deeply in love, dating for five years, ready to buy a house. They’d come up with a combined budget so it was time to apply for a mortgage.

Now, if you’ve never applied for a mortgage before, you can think of it like a “final exam” of your personal finances. Absolutely everything will be on display: your job, income, credit score, net assets, savings, investments, and much, much more.

And if you’re cosigning with a significant other, they’re going to see all of it, too – and you’ll see theirs.

Case in point, before applying for a mortgage, John and Jane hadn’t really discussed their personal finances beyond vague indications of their annual salaries. They figured that as long as they both made rent on time, the rest was on a need-to-know basis.

But the conversation changed once they were denied for preapproval.

As it turns out, Jane still had a credit card from college with an $8,231 balance and it had been wreaking havoc on her credit score for years. And since mortgage lenders typically look at the “lower middle” credit score on a joint mortgage application, it was looking increasingly impossible for John and Jane to cosign for a home together.

Days later and totally despondent, the pair met with Joss, an old friend with decades of experience in the finance world. They explained their situation, and how as a Sous Chef, Jane simply wasn’t earning enough to pay off a card with such a punishing interest rate.

“I feel like I’m just pouring water on a grease fire,” she lamented.

Joss – who had become somewhat hardened during her time in Afghanistan and later on Wall Street – responded to Jane’s outpouring rather matter-of-factly.

“Why not do a balance transfer?”

Silence followed. John and Jane put down their drinks.

Joss proceeded to walk Jane through the exact steps listed above – move her balance to a new card with 0% interest for 18 months, pay it off quickly, and repair your credit from there.

“How much have you paid in interest already, Jane? Never mind. Don’t answer that,” she said, shaking her head as she bit into her French dip.

But Jane’s cheeks rouged with emotion. She knew the exact number.

Over the next few months, the trio worked to repair Jane’s credit from 590 to 650 so she could apply for a half-decent balance transfer card. Then, graced with 0% APR for 15 months, Jane began living on a shoestring and making the largest possible monthly payments against her debt.

Jane later told me that despite making big lifestyle sacrifices, she was continuously spurred on by two things. The first, of course, was the thought of finally owning a home with John.

The second was finally seeing her $8,000+ debt stop growing. She said that despite the fees, conducting a balance transfer felt like “casting a Patronus spell against a Dementor of debt,” and that she finally felt empowered against an antagonistic force that had been dogging her since college.

In saying that, Jane tapped into a more intangible-yet-potent benefit of balance transfers—the stress relief. American households took on nearly $3 trillion more debt during the pandemic, and roughly three-quarters (74%) of working Americans say they’re stressed out about their personal finances. If balance transfers were a more widespread and well-known tool, that statistic could very well go down.

Within nine months, Jane had fully paid down her $8,231 and defeated her “debt Dementor.” Better still, the combination of making regular on-time payments and lowering her credit utilization ratio boosted her credit score to 690, well into the Good range.

And within a few short months after that, John and Jane had me, Joss and several other friends over for a housewarming.

Bottom line

While calling them a “magic spell,” may be hyperbole, balance transfers are still a handy tool for crushing credit card debt. They’re common and easy to do, and if you transfer high-interest debt before it gets out of hand, you can save thousands in unnecessary payments, save your credit score, and become debt-free faster.

For more ways to accelerate your path to financial freedom, be sure to check out 7 steps to start saving money.