If you’re carrying a substantial amount of credit card debt, there’s a good chance that you’ve probably at least considered the credit card balance transfer pros and cons in order to pay off credit card debt with high interest rates. And with good reason: With super-low interest rates, balance transfer offers from major credit card companies and credit unions can seem like a ray of hope in an otherwise bleak debt situation.
Credit Card Balance Transfer Pros and Cons
But are credit card balance transfers a good way to get out of credit card debt? Or will a balance transfer end up doing more harm than good in the long run? Well, that depends on several factors. In some cases, balance transfer credit cards can help make a dent in your high-interest credit card debt and potentially help you become debt-free sooner. But if you can’t commit to responsible use, or if you don’t do your homework before you apply, balance transfers can actually create more debt problems.
Not sure if a balance transfer is right for your financial situation? Here are five things to consider before applying for a balance transfer credit card as part of your debt repayment strategy.
The 0% intro APR is temporary.
The most appealing part of a balance transfer is that most balance transfer offers come with an introductory 0% APR – which is especially appealing if you’re currently paying down a credit card with an annual percentage rate of around 15 to 17%. But here’s the thing: Those zero-percent interest rates aren’t permanent: They’re introductory rates, and, depending on the card, they expire anywhere from 6 to 24 months after you open the account. This period is often referred to as the promotional period or introductory period length.
If you can pay off your entire principal balance before the 0% introductory APR expires, you’ll save some money. If you can’t, you might not be much better off than you were before the balance transfer, and you may need to consider other options like a debt consolidation loan, a home equity loan, or an auto loan to consolidate debt payments.
You’ll pay a balance transfer fee.
A typical balance transfer fee is around 3% of the transfer amount – and you’re charged right away. So, let’s say you transfer $15,000 in credit card debt to a new card. If your new credit card company charges a 3% balance transfer fee, you’re looking at an extra $450 in fees.
Keep in mind that balance transfer fees aren’t always a dealbreaker. If you think you can pay off your $15,000 balance before the promotional APR expires, you’ll probably still come out ahead – even with the balance transfer fee. On the other hand, if you think you can pay it off in a few months, it might make better financial sense to skip the balance transfer (and the accompanying fee) and focus on paying off your debt quickly with your current debt payoff plan.
It’s important to read the balance transfer fine print.
This should be standard practice when applying for any credit card, but it’s especially important with balance transfer credit cards. Pay special attention to when your introductory APR expires, as well as the rules for grace periods, new purchases, annual fees, and foreign transaction fees. Also, be aware of any minimum fees associated with the balance transfer.
Of course, if you’re planning to use your balance transfer credit card for new purchases or – even worse – cash advances, you may need to seriously consider whether a balance transfer is right for you. This brings us to the next item on our list . . .
Balance transfers can result in more debt.
Used responsibly, this method of debt consolidation can help save you some money in credit card interest payments, making it faster and easier to pay off credit card debt. If you don’t use your balance transfer credit card responsibly – as in, you use it to make more impulse purchases you can’t afford or you treat it like a makeshift emergency fund – you’ll likely end up in more debt than you were when you started.
This is why it’s so important to do an honest self-evaluation of your financial management skills before you apply for a balance transfer. If you’re not 100% sure that you can use your balance transfer credit card responsibly, you might want to consider other methods for paying off debt, such as unsecured loans, a personal loan, or even a home equity loan. Creating a strict payment plan can also help ensure you stay on track with your debt repayment goals.
If you’re not careful, balance transfers can hurt your credit score.
The goal of a balance transfer should be to pay down high-interest credit card debt, which in turn will help reduce your credit utilization ratio. Your credit utilization is the amount of your available credit limit that you’re using, and the lower this ratio, the better it is for your credit profile. And the more unused credit you have, the higher your credit score.
Sounds simple, right? Well, it is – provided you avoid a few common balance transfer missteps that can bring down your credit score. I’ve already mentioned the risks of racking up more debt, but that’s only one possible credit-killer. A few other things to keep in mind: Balance transfers can take several days to process, so keep making at least the minimum monthly payment on your old card until your balance transfer is official. Once the balance transfer is complete, avoid closing the “old” card – keeping it open will increase your total available, unused credit limit. And finally, avoid applying for too many new credit cards at once – multiple hard inquiries on your credit report in a short amount of time can ding your credit score.
So, are balance transfers a good idea? I guess the short answer is, balance transfers aren’t always the best solution for paying down debt. But when you’re dealing with debt, there’s not always a “best” solution. And if you know what you’re getting into beforehand, balance transfers can be a useful tool in your overall debt repayment strategy.
Remember, to qualify for the best balance transfer offers, you typically need excellent credit. If you have good credit scores, you might still qualify for some balance transfer options, but the terms may not be as favorable. Also, keep in mind that some credit card companies only allow balance transfers from a different card issuer, so you may not be able to transfer balances between cards from the same card issuer.
When considering a balance transfer, it’s crucial to factor in your monthly payment amount and how it fits into your budget. Make sure you can comfortably afford the payments needed to pay off the balance within the introductory period length. Missing payments or making late payments can result in late fees and potentially losing your promotional APR.
And remember, if you need information or advice about how to pay off credit card debt, including how to use a balance transfer calculator or create a comprehensive debt payoff plan, you can contact the Debt Guru team today for a free debt consultation. They can help you explore various options, including balance transfers, home equity loans, and other strategies to consolidate debt payments and manage your due dates effectively. They can also advise you on the potential impact of a hard inquiry on your credit report when applying for a new balance transfer card and help you determine if transferring balances to a card from the same card issuer is possible in your situation.