Understanding Credit Card Balance Transfers

The 0% introductory interest rate on balance transfers is a common feature of many credit cards targeted to consumers with good to excellent credit. While this offer looks great on the surface, people who take advantage of it might find themselves on the hook for unexpected interest charges.

The problem is that transferring a balance means carrying a monthly balance, and carrying a monthly balance—even one with a 0% interest rate—can mean losing the credit card’s grace period and paying interest charges on new purchases. Here’s what you need to know about this potential situation and how to avoid it.

How Do Balance Transfers Work?

A balance transfer involves moving outstanding debt from one credit card to another card—typically, a new one. Consumers generally use credit card balance transfers to secure a significantly lower promotional interest rate—say, 0% for 12 to 18 months—and perhaps better benefits, such as points for purchases or rewards programs for earning cash back.

If you’ve gotten approval for a card with a 0% interest balance-transfer offer, find out whether the 0% rate is automatic or depends on a credit check. Next, decide which balances to transfer; cards with high interest rates should come first. (The balance doesn’t have to be in the cardholder’s name to qualify for a transfer.)

There will also be a transfer fee that is charged on making the balance transfer. Typically, the fee will be 3% to 5% ($30 to $50 for every $1,000 transferred). If there is an amount cap on the fee, it can make transferring a larger balance worthwhile. Be sure to check the credit limit on your new card before you initiate a transfer as your requested balance transfer cannot exceed the available credit line, and balance-transfer fees count toward the limit.

Balance transfers can be done with balance transfer checks provided by the issuer of the card to which the balance is being transferred. You simply make the check out to the card company you want to pay. (Some credit card companies will let the cardholder make the check out to themselves, but make sure this will not be considered a cash advance.) Alternatively, the transfer can be done online or by phone. In those cases, you contact the credit card company to which you are transferring the balance. Give them the account information of the credit card you want to pay down, along with the amount, and they’ll arrange the transfer of funds.

What Is the Grace Period?

The grace period is the time between when your credit card billing cycle ends and when your credit card bill is due, during which you don’t have to pay interest on your purchases. By law, it must be at least 21 days. You only get the grace period if you aren’t carrying a balance on your credit card.

What many consumers don’t realize is that carrying a balance from doing a promotional balance transfer—not just from making purchases—can mean losing the grace period on any new purchases made with the card.

With no grace period, if you make any purchases on your new credit card after completing your balance transfer, you’ll incur interest charges on those purchases from the moment you make them. When that happens, some of the money you’re saving by having a 0% interest rate on the balance transfer will go right back out of your pocket.

At that point, the only way to get the grace period back on your card and stop paying interest is to pay off the entire balance transfer as well as any new purchases. If you had enough cash saved up to do that, you probably wouldn’t have done the balance transfer in the first place.

Balance Transfer Math

A transfer can save you money…

Say you have a $5,000 balance on a credit card with a 20% APR. Carrying that balance is costing you $1,000 a year in interest. If you get a 0% balance transfer offer on a new credit card, with a one-year promotional period, you can move your $5,000 balance to the new card and you’ll have a whole year to pay it off with no interest. The balance transfer fee in this case is 3%, which amounts to $150.

Even after the fee, you’ll come out way ahead by not paying interest for a year, as long as you put about $415 per month toward your $5,000 balance so that it’s paid in full by the end of the promotional period.

…Unless you buy something else on that card

Let’s say you need to spend $150 on groceries during a routine shopping trip and you charge it to your new card, the same card to which you’ve transferred the balance.

You assume that if you pay off the $150 when your bill comes due in three weeks, you won’t owe any interest on the purchase—after all, you just made it. And you know you’ll have the money because your financial situation has improved since you moved that $5,000 balance. You were unemployed then; you have a job now and you’re not taking on new debt, just cleaning up the past. You just charged the purchase to your card for convenience.

But when your credit card statement arrives, you find you’ve been charged 15% APR—the new card’s interest rate on purchases—on your $150 grocery shopping. It’s a small amount, but what if you had charged your child’s college tuition for the semester? Plus, there’s the principle of the thing: If you’re going to pay interest or fees to a credit card company, you want to do it knowingly, not because the company caught you off guard.

The rules governing this process are spelled out in the fine print. Credit card companies used to routinely apply payments to the lowest-interest balances first, in which case any amount over the minimum payment would go toward the balance transfer amount, and any purchase balances would keep sitting there accruing interest at the higher interest rate until paid off. However, with the advent of the Credit Card Act of 2009, issuers must first apply payments above the minimum amount due to the highest interest rate balance.

Pros and Cons of Credit Card Balance Transfers

Deceptive Marketing

The Consumer Financial Protection Bureau (CFPB) has said that many card issuers don’t make these terms clear in their promotional offers. It calls card issuers’ failure to clearly disclose the loss of the grace period “deceptive” and potentially “abusive.”

Credit card issuers are required to tell consumers how the grace period works in marketing materials, in application materials, on account statements and with balance transfer or cash advance checks, the CFPB states. It says some issuers aren’t doing so in a way that consumers can easily understand. In fact, the fine print might not even use the term “grace period” and instead say something like “avoiding interest on purchases.” 

Also, bear in mind that many balance transfer offers don’t guarantee that you will actually receive a 0% balance transfer for the maximum number of months in the introductory period. Your credit score determines what you actually get. Unless you have excellent credit, you could wind up with a low-interest balance transfer for a fraction of the time you expected.

Decoding Grace Period Terms

Here’s a real-life example from Discover that indicates you will pay interest on new purchases, with no grace period, if you take advantage of a balance transfer offer:

“You can avoid interest on new purchases you make if you pay your entire balance in full each month. This means unless you have a 0% introductory purchase APR, you will pay interest on new purchases if you do not pay the balances you transfer under this offer in full by the first payment due date.”

Citi puts it this way:

“If you transfer a balance, interest will be charged on your purchases unless you pay your entire balance (including any balance transfers) by the due date each month or you have a 0% promotional APR on purchases.” 

Wells Fargo is somewhat clearer—and at least uses the term “grace period”:

“If you transfer amounts owed to another creditor and maintain a balance on this credit card account, you will not qualify for future grace periods on new purchases as long as a balance remains on this account.” 

Keep in mind the CFPB’s warning that consumers may not be able to find the information they need in the fine print. Sometimes these statements aren’t even in the credit card offer itself, but elsewhere on the credit card issuer’s website, such as in a help, FAQ, or customer service area.

How to Avoid the Balance Transfer Trap

If the terms of the grace period for purchases after you do a balance transfer are unclear to you, you have three options:

1. Take a pass on the offer, and look for one with clearer terms.

2. Go for the 0% balance transfer offer, but don’t use the card for any purchases until you’ve completely paid off the balance transfer. 

3. Choose a credit card that offers a 0% introductory APR for the same number of months on both balance transfers and new purchases. Numerous such offers are advertised in the market.

The Bottom Line

If you want to accept a balance transfer offer, don’t assume that the only costs are the balance transfer fee plus the interest rate, if any, charged on the transferred balance. If you use the card to make new purchases, be aware that you may incur interest on those charges from the day you make them, rather than getting the interest-free grace period you normally receive when you pay off your purchases in full, on or before the billing due date.

The fact of the matter is that not all credit cards are created equal, and some balance transfer cards are better than others. It’s best not to apply for any new credit card with the goal of using its balance transfer promotion until you know exactly how balance transfers work with the issuer and if the transfer will eliminate the grace period on any new purchases.