A balance transfer is a transaction in which the debtor transfers a credit card balance to a different credit card. It can be an effective way to consolidate debt and save on interest expenses.
Example Balance Transfer
Bob has two credit cards. The first card is with Bank One and has a total balance of $2,000 and a 15% interest rate. Bob has a second credit card with Bank Two, which has a total balance of $1,000 and a 13% interest rate.
Bob receives a balance transfer offer from Bank Three with a 0% introductory annual percentage rate (APR) for the first 12 months after completing a balance transfer. After the 12-month period expires, the APR is 18%. Bank Three charges a transaction fee of 3% on any funds moved. Bob decides to accept the offer and opens an account with Bank Three.
Bob initiates a balance transfer to move $2,000 from Bank One and $1,000 from Bank Two. After the transfer, the credit card balances at Bank One and Bank Two are now zero. The new total credit card balance at Bank Three is now $3,090, which comprises the following:
- $2,000 transfer from Bank One
- $1,000 transfer from Bank Two
- $90 balance transfer fee ($3,000 times 3%)
The total credit card balance at Bank Three is $3,090, subject to a 0% interest rate for the first 12 months. After the 12-month introductory period expires, the APR is now 18%.