Balance Transfer

A balance transfer is the movement of an outstanding debt, usually a credit card balance, from one account to another, most often to a new card that offers a low or 0% promotional interest rate for a fixed period. The new card issuer pays off the old balance and the borrower then owes the same amount to the new issuer, usually plus a one-off transfer fee. Balance transfers are used to cut interest costs while paying down debt, or to combine several balances into one.

Balance transfers are a feature of revolving credit and a common tool of personal debt management. They are related to, but different from, debt consolidation loans, which replace card balances with a fixed installment loan. Issuers use promotional transfer offers as a customer-acquisition tool, betting that some customers will keep a balance after the offer ends.

Imagine you owe money to a shop that charges a high fee every month you owe it. A second shop offers to pay off that debt for you, and to charge you nothing extra for the next year or so, in return for a small one-time charge. You still owe the same amount, but now to the second shop and without the monthly fee for a while.

The deal works if you use the quiet period to pay the debt down. If you do not, the second shop's normal fee kicks in when the offer ends, and you may also have run up new debt at the first shop.

1. The borrower applies for, or already holds, a card with a transfer offer and gives the new issuer the details of the account to be paid off. Most issuers do not allow transfers between two of their own cards.
2. The new issuer pays the old creditor directly, which can take days or a couple of weeks; the borrower keeps paying the old account until the transfer posts.
3. The transferred amount, plus a fee, appears on the new card as a separate balance with its own rate. The transfer cannot exceed the available credit limit.
4. When the promotional period ends, any remaining transferred balance is charged at the card's standard rate.

US card fees for transfers are commonly 3% to 5% of the amount moved, often with a small fixed minimum, and count as a finance charge. Transfers, like cash advances, usually do not get a grace period. A related tool is the convenience check, a check drawn on the card account that can be used to pay off another debt and is often treated as a balance transfer.

Whether a transfer pays off depends on the interest avoided compared with the fee. A simple way to compare is:

• $S$ is the net saving from the transfer.
• $I_{\text{old}}$ is the interest that would be paid by clearing the debt on the old card over the same period.
• $f$ is the transfer fee rate, for example 0.03 for 3%.
• $B$ is the balance transferred.
• $I_{\text{new}}$ is any interest charged on the new card during the payoff period (zero if cleared within a 0% offer).

Worked example: a borrower owes $5,000 at an APR of 24%, about 2% a month. Clearing it in 15 equal payments on the old card takes about $389 a month and costs about $837 in interest. Moving it to a card with 0% for 15 months and a 3% fee costs $0.03 \times 5{,}000 = 150$ and then $343.33 a month. The saving is $S = 837 - (150 + 0) = 687$, about $687. If only half the balance is cleared within the 15 months, the rest is charged the standard rate and the saving shrinks.

Regulation Z, as amended under the Credit CARD Act of 2009, shapes how transfers behave on US cards:

• A promotional rate must last at least six months, and the issuer must disclose before the offer starts how long it lasts and what rate applies afterwards (12 CFR 1026.55(b)(1)).
• A promotional rate can be lost early if a minimum payment is more than 60 days late.
• Payments above the minimum payment must go first to the balance with the highest APR (12 CFR 1026.53), so new purchases at the standard rate are paid down before a 0% transfer balance.
• Deferred-interest offers, more common on store cards than on bank card transfers, charge back-dated interest on the whole amount if any balance remains when the period ends; a true 0% offer waives the interest outright.

The Consumer Financial Protection Bureau also warns that when a cardholder carries a transferred balance, new purchases on that card usually accrue interest from day one unless the entire balance, including the transfer, is paid in full. Many borrowers therefore keep a transfer card for the transferred debt only.

The main risks are behavioural. Borrowers who keep spending on the cleared old card end up with two debts. Opening a new card adds a hard inquiry at a credit bureau and a new account to the borrower's credit report, which can lower a credit score in the short term, though a lower utilisation of total limits may help later. Missing a payment can end the promotional rate and, if it continues, push the account towards default. Approval and the size of the limit depend on credit quality, so the borrowers who most need cheaper debt may not qualify.

Balance transfer cards are widely marketed in the UK, where long 0% offers have been common, and the Financial Conduct Authority's persistent debt rules require card firms to help customers who are not reducing their balances.

• 12 CFR 1026.55 — Limitations on increasing annual percentage rates, fees, and charges
• 12 CFR 1026.53 — Allocation of payments