How credit card balance transfers work, including the revert rate

Key points

• A balance transfer moves a balance you already owe on one credit card onto a new credit card, which charges a promotional rate (often 0%) on the transferred amount for a set period, usually somewhere between 6 and 24 months.
• Four numbers decide whether a balance transfer helps: the transfer fee, the promotional rate and how long it runs, the repayment that clears the balance before the window ends, and the revert rate charged on anything left.
• Moving $6,000 with a 2% transfer fee onto an 18-month 0% offer means $6,120 to clear, which is $340 a month (illustrative). The credit card's own minimum repayment on that balance would start at about $122.
• Whatever is still owing when the promotion ends is charged at the revert rate, which is often the ordinary purchase rate and on some credit cards the cash advance rate.
• New purchases on the new credit card usually sit outside the promotional rate, and the old credit card is left with a zero balance and an open limit.

A balance transfer moves a balance you already owe on one credit card onto a new credit card, which charges a promotional rate (often 0%) on the transferred amount for a set period. Nothing about the balance itself changes when it moves. You owe the same amount to a different provider, and for the length of that period it stops accruing interest at the old rate, which is what the offer does for you. Whether it helps comes down to what you do inside that window. So here we go through the four numbers that decide it, what happens to anything still owing when the promotion ends, what a transfer leaves behind on both credit cards, and how it compares with paying the balance down where it is.

The four most important numbers

The transfer fee. Commonly a percentage of the amount you move, charged once, and usually added to the transferred balance rather than billed separately. On $6,000, a 2% fee is $120, so what lands on the new credit card is $6,120 (illustrative). It's worth reading as part of the balance rather than as a separate cost, because it's part of what you have to clear.

The promotional rate and how long it runs. Often 0%, for a set number of months. The period runs from when the transfer is processed rather than from when you get around to making a plan, so the end date is fixed before you've made your first repayment. It's in the offer documents and on your statement.

The repayment that clears the balance before the window ends. This is the number nobody sets for you. $6,120 over 18 months is $340 a month. What the credit card asks for instead is its minimum repayment, worked out as the greatest of the amount you're over your credit limit by, 2% of the closing balance rounded down, and $25 (some credit cards set a higher percentage, so your statement is where to check). On a $6,120 balance that's about $122, roughly a third of what clearing it in time takes.

The revert rate. The rate charged on anything still owing once the promotion ends. It's published alongside the promotional rate from the start, and it's usually a lot higher.

Below is the same 18 months either way (illustrative), paying $340 a month in both cases, with the old credit card at 20.99%.

Same money over the same 18 months, and the difference is about $1,080 still owing. Left where it is, $340 a month clears the $6,000 in 22 months and costs about $1,240 in interest along the way. That gap is what the offer is worth when the repayment is sized to the window. Pay less than $340 and the gap narrows, because whatever you don't clear meets the revert rate when the promotion ends.

The repayment that clears the balance before the window ends is the only number that makes the offer work, and it isn't the minimum repayment.

What happens if you don't clear it in time?

Whatever's left is charged at the revert rate (the revert rate is often the credit card's ordinary purchase rate, however on some credit cards a remaining transferred balance reverts to the cash advance rate instead, so it's worth checking which one applies in the terms).

Nothing else happens on that date. There's no penalty and no fee for having a balance left. The promotional rate stops applying and the balance starts accruing interest the way any credit card balance does.

How much that matters depends on how much is left. Take the same $6,120 and pay only the minimum repayment through the 18 months. The balance does fall, however slowly, because the minimum is a percentage of a shrinking balance: about $4,260 is still there when the promotion ends (illustrative), and at a revert rate of 20.99% that balance would cost about $75 in interest in its first month back on the ordinary rate. What paying only the minimum does to a credit card balance over time has its own explainer.

So work backwards from the end date rather than forwards from the minimum. Diarise it the day the transfer goes through, and divide the balance by the months you have. If that number is more than you can pay, you'll know it at the start rather than at the end.

Savings accounts run the same structure in the other direction, where an introductory rate lasts a set number of months and then drops to the ongoing rate, and the habit that protects you is the same either way: know the date the rate changes, and what it changes to.

The part that undoes it

A transfer leaves you holding two credit cards rather than one, and both of them affect whether the balance is gone by the end date.

New purchases on the new credit card usually don't get the promotional rate. They're charged at that credit card's purchase rate, which is a separate and normally much higher rate than the transfer rate. On most credit cards, while you're carrying a balance, purchases also start accruing interest from the day they're made rather than getting interest-free days. Why that happens comes down to how credit card interest is calculated day to day, which is worked through properly in its own place, along with how interest-free periods work and what happens when they end. Either way, a purchase on a credit card carrying a transferred balance can start costing you interest immediately, and it adds to the amount that has to be cleared before the window closes.

The old credit card is left with a zero balance and an open limit. A transfer moves the balance, it doesn't close the account, so unless you close the account or reduce the limit yourself, the credit that was full is now empty and available. That's how a transferred balance can rebuild on the old credit card while you're paying down the transferred one on the new one.

Whether to close it is a trade-off rather than a discipline test. A credit card you've kept for a specific purpose, covering emergencies while your buffer builds for instance, is completely fine. An open limit with no specific restrictions, however, is how balances come back. So if you're going to keep it open, make that decision deliberately: match the limit to what you're actually keeping it for, and know that even at a zero balance, an open credit limit is counted by lenders when they assess a future application. What to do with paid-out credit cards, and how credit limits can affect you, both have their own places to be worked through properly.

How it compares with just paying it down, or consolidating

Which of these fits depends on the size of the balance and how long you'd take to clear it either way.

Paying it down where it is avoids the transfer fee and the credit application entirely. Where the balance is small enough that you'd finish it inside a few months, the saving can be modest: $1,500 cleared over six months costs about $93 in interest, and a 2% transfer fee on the same amount is $30 (both illustrative), so moving it might save you around $60, at the cost of a new credit card account and an enquiry on your credit file. Some people will take that trade and some won't, and either is a fair call. And where a balance has been standing still despite regular payments, that's worth diagnosing before you move it, because moving a balance doesn't change whatever was refilling it. Where several balances are involved and you're paying them down yourself, the order you clear them in is worth thinking about separately.

A balance transfer suits a balance you can genuinely clear inside the window, at a repayment you can make every month for the whole period rather than only in the good months. It's the cheapest of the three while the promotion runs, and the benefit depends on the balance being gone, or close to it, before the promotion ends.

Consolidating suits a different problem: several balances rather than one, where a single fixed repayment and a set end date matter more than a promotional rate. A balance transfer only reaches credit card debt, so where what you're carrying is spread across credit cards, buy now pay later and loans, it addresses one part of it. Whether reorganising several debts into one repayment would leave you better off turns on the term, the rate and the fees rather than on a promotional period, and that assessment has its own place. So does the fuller comparison of debt consolidation, balance transfers and personal loans.

A worthwhile 5-minute check, whether you've already transferred a balance or you're looking at an offer: find the promotional end date, count the months left, divide the balance by that number, and compare it with what you're actually paying each month. If the two match, you're on track to clear it in time. If they don't, the difference is what will be sitting there at the revert rate, and knowing that now leaves you time to do something about it.

Pro tip: Once your accounts are connected in WeMoney, the transferred balance sits next to your other debts and repayments in one place, so you can keep on top of it against the promotional end date instead of finding out from a statement.

Sources

• Moneysmart: Credit cards
• Moneysmart: Credit card calculator

This article provides general information only. It does not take your personal circumstances into account and is not financial, credit or legal advice. Consider your own situation and seek advice from a suitably qualified professional if you need it.