A balance transfer moves debt from one card to another at a promotional rate, usually zero, in exchange for a fee charged on the amount moved. Both halves are deliberate.
The receiving bank pays out real money
When a transfer is processed, the new issuer settles the balance owed to the old one. Cash leaves the receiving bank and a loan to the customer replaces it.
That loan has to be funded, through deposits or wholesale borrowing, and the funding costs the bank money for every month the balance remains outstanding.
During a zero-interest period the bank earns nothing from the borrower, so the upfront fee is what covers the funding cost across the promotional term.
The fee is an effective interest rate in disguise
A fee charged once on the transferred amount can be converted into an annualised cost by spreading it over the promotional period.
The shorter the promotional window, the higher that effective rate becomes, because the same fee is amortised over fewer months.
Comparing offers therefore requires looking at fee and duration together. A longer term at a slightly higher fee is frequently cheaper than a short term at a low one.
The business case depends on who stays
Issuers expect a share of transferred balances to remain outstanding when the promotion ends, at which point the standard rate applies and the account becomes profitable.
They also expect some cardholders to make purchases on the same card, and purchases usually attract interest immediately because the account is not paid in full.
The offer is priced against these expectations. A borrower who clears the balance within the term and makes no purchases is the case the bank least wants.
Payment allocation rules shape the outcome
Where a card holds both a promotional balance and a purchase balance, payments above the minimum are commonly applied to the highest-rate portion first.
That protects the borrower from a trap where payments clear the interest-free balance while the expensive one grows, but the rules vary by jurisdiction and by agreement.
Using the transfer card for new spending remains a poor idea in any case, because it removes the grace period on those purchases from the outset.
What ends the arrangement early
Promotional rates are typically conditional on the account remaining in good standing, and a missed payment can cancel the offer immediately.
The balance then reverts to the standard rate, and the fee already paid buys nothing further. This is the most common way a transfer becomes more expensive than the original debt.
Transfers also have a window, often limited to the first months after opening, after which the promotional terms no longer apply to new movements of balance.