What is a balance transfer credit card?

As you save for life's goals, you'll want to explore any option that helps you pay down your credit card debt. Responsible spending and budgeting are solid places to start, but you can also look into ways to reduce those pesky interest payments that come along with many purchases. If you have a high-interest-rate credit card, you could look into a balance transfer credit card to whittle down those payments.

A balance transfer credit card lets you transfer a balance from a higher-interest card to a new or existing credit card with a lower interest rate or temporary 0% introductory annual percentage rate (APR) offer. It can help you save in total interest costs and pay down balances faster. If you apply for a new card with a lower interest rate after the introductory APR period, you could also save on future purchases if you need to carry a balance.

A balance transfer is a fairly straightforward process. From choosing the card to paying down your balance, research the best offer and then pay down your debt.

1. Decide which credit card to use

   If you already have credit cards, review your current cards for available balance transfer offers. Then, compare those offers with new credit cards with attractive intro APR offers. If you're applying for a new credit card, you'll submit your application. Once approved, you'll be able to initiate your balance transfer.

2. Initiate your balance transfer

   The simplest way to initiate a balance transfer is during the new account opening process or through your existing online credit card account. During the process, you'll indicate the card issuer, account number and balance you want to transfer to your new credit card. Once the process is complete, you'll typically receive a confirmation email from the credit card company receiving the transferred balances.

3. Bide your time until the transfers go through

   Transfers don't happen overnight, so patience is key. They can often take a few weeks to show on your account. Once complete, you'll see the transferred balance and the balance transfer fee noted in your account.

4. Set up payments

   Ideally, you'll want to pay down your transferred balance before the end of the promotional APR period. So if your promotional period is 12 months, you could set up an automatic monthly payment for 1/12 of the balance.

5. Pay off your balance in full

   If you can pay down your entire transferred balance by the end of the promotional period, that's terrific. If you have a bit left to go, try to pay off the remaining balance as soon as possible to save on interest.

Balance transfers can be an effective way to save interest on your credit card balances, but they typically come with small convenience fees. You can expect to pay a balance transfer fee of 3% to 5% of the amount you're transferring, but you don't have to pay this fee out of pocket. Instead, it's included in the available credit on your balance transfer card.

For example, if you're approved for a balance transfer credit card with a $10,000 credit limit and a 3% balance transfer fee, you can transfer $9,700 to the card ($10,000 minus the $300 balance transfer fee).

To figure out if you'll save money with a balance transfer, do some quick math. Say you want to transfer $9,000 from a card with a 22% APR to a card with a promotional APR of 0% for 12 months with a 3% balance transfer fee. You can calculate the interest you'd pay on the current card compared to the interest you'd pay on the new card for the length of the promotional term.

Current card: $9,000 x 22% APR = $1,980 in interest for 12 months

Balance transfer card: ($9,000 + $300 balance transfer fee) x 0% APR = $0 in interest for 12 months

Keep in mind that these figures are only estimates. To get a more exact idea, you can use an online balance transfer calculator with specific details from the original and balance transfer cards.

The amount you're ultimately able to transfer to your new credit card will depend on the issuer's terms and conditions. While some credit card issuers may let you transfer amounts up to your credit limit (less balance transfer fees, of course), other issuers impose lower limits. For instance, your new credit card might come with a $10,000 credit limit but cap balance transfers at $5,000. If you're not sure of the balance transfer limits of a new credit card, you can call the issuer before applying to get the details.

To get the most bang for your buck, find a balance transfer credit card with a 0% introductory APR and a generous promotional term length. You can typically find cards with these features from a wide range of banks, each offering different features, rewards and more.

Cards like Citizens Clear Value® Mastercard® could be a top consideration if you want to transfer a balance. For instance, it offers an 18-month 0% APR, which gives you an extended term to pay down transferred balances. The card also comes with no annual fee and competitive APRs after the promotional term ends — as low as 19.24% on purchases, depending on your credit history. Plus, the Mastercard logo ensures you can use your card at more than 36 million locations worldwide, so it's a card as ready to travel as you are.

Before you get started with a balance transfer, understand how the process can impact your personal finances.

Could a credit card balance transfer raise your credit limit? When you apply for a balance transfer credit card, you could be approved for a higher credit limit than you have on your current credit cards. Card issuers typically reward the highest credit limits to customers with high credit scores and an income and credit history that demonstrates a responsible track record of debt management.

If you apply for a new credit card, you'll likely see a temporary dip in your credit score from the inquiry. However, you could also see your score increase, thanks to your new credit line. Credit scoring agencies use credit utilization — the percentage of available revolving credit in use — to calculate your score. When you add a new credit line like with a balance transfer credit card, you're actually decreasing your credit utilization, which can increase your score. For instance, say you have a total revolving credit of $30,000 before your new balance transfer credit card and you're using $10,000 (or 33%). By adding your balance transfer card with a $10,000 credit line, you're increasing your total revolving credit to $40,000 and still only using $10,000. This reduces your credit utilization ratio to 25%, which could bump up your credit score.

The most significant impact on your credit score is from how well you repay your debts. On-time payments and lower balances are the keys to a solid credit score.