Transferring your debt to a 0% interest balance transfer credit card seems like a no-brainer right?
You pay no interest for a promotional period of time so 100% of your payment will go to the principal.
It sounds like a win-win, but that’s not always the case.
To determine if transferring your debt to a balance transfer card makes sense for you, it’s helpful to know all the benefits and downsides or these popular cards.
We’ve put together this complete list of the pros and cons of balance transfer credit cards to help you decide if you should transfer your balance.
The Pros of Balance Transfer Credit Cards
Enjoy 0% interest for a period of time
The biggest advantage of a balance transfer credit card is the 0% APR introductory period, which typically run for either 12 or 18 months. The promotional 0% APR helps you accelerate your debt repayment since all of your payments will go directly to the principal without being wasted on interest charges.
You can make a big impact on your bottom line by transferring your balance to a credit card with a 0% or lower interest rate. You may even be able to pay off your entire balance during the introductory period.
That is how you transfer your debt to a balance transfer credit card the right way.
A 0% balance transfer card can save you money
Paying less interest on your credit card debt will save you money but you still need to run the numbers and factor in the balance transfer fee and the standard interest rates once the promotional period ends.
Here’s an example of good balance transfer numbers:
Let’s say you have $5000 in credit card debt which requires you to pay 30% interest. If you pay $300 a month, you will pay off that card in 22 months while paying $1,549 in interest for a total of $6,549.
On the other hand, if you transfer that balance to an 18-month, 0% interest credit card your numbers would look like this:
You would pay the same $300 a month for only 17 months, paying $0 in interest for a total cost of $5,000, minus the 3% balance transfer fee most credit companies charge, which works out to $150 in this example.
That means you would save $1,549 dollars minus the $150 balance transfer fee for a total savings of 1,399 with the added benefit of paying off your debt 5 months sooner.
You can enjoy better terms and even get rewards
The credit card landscape is extremely competitive, and companies are trying harder than ever to capture your business.
So, if you have lousy terms with your current credit card, such as high fees or a short grace period, you can dump that credit card and enjoy better terms with someone else. Look for the best introductory interest rate while also keeping an eye out for the interest rate once the promotion period ends.
While you’re at it, compare the best low-interest credit card offers for the most attractive rewards programs as well.
Consolidate your credit card debt to make your finances simpler
Consolidating your credit card debt makes budgeting a little easier and more convenient. Just having all your debt in one place makes it easier to manage and pay down your debt. What’s more, transferring your balance to a 0% card can create space in your budget, which is ideal if you’re trying to stop living paycheck to paycheck.
The Cons of Balance Transfer Credit Cards
The APR is only temporary
Remember, banks are making a bet on you. They are willing to give you an attractive promotional rate and they are counting on you not paying off your balance on time. If you don’t pay off your debt before the promotional rate expires, you’ll be hit with a considerably higher revert rate, which often falls in the 25%-30% range.
But you don’t have to get stuck with this rate. Instead, do your homework ahead of time and make sure the standard rate is not excessive.
Even better, don’t get a balance transfer credit card unless you know you can pay off the balance during the low-interest promotional period.
Balance transfer accounts can be very expensive
Most banks charge a balance transfer fee of 1% to 3% as well as the annual service fee.
In the “Pros” section above, we showed you an example of a balance transfer credit card that saved you money.
Now let’s take a look at a balance transfer that’s not quite a slam dunk like we saw before.
Let’s say you have a credit card with a $3,000 balance at 20% interest.
If you are paying $140 per month, you will pay off the debt in 27 months, including $742 in interest. In total, you will pay $3,780 in this scenario.
But, what if you found a balance transfer credit card offering a 12-month promotional period with 0% interest and a standard 3% balance transfer fee. You could transfer your balance for $90 and pay down $1,680 of your debt in the first 12 months. Your balance (initial $3,000 plus the $90 transfer fee) of $3090 would be $1,320.
Now for the bad news:
The promotional period ends and the bank increases the interest rate to 30%. If you continue paying $140 per month, you would pay off the debt in a total of 23 months. Your total out-of-pocket expenses would be $3,320, including only $204 in interest fees.
In this case, you would only save 4 months’ payments or $460 dollars. Don’t get me wrong, $460 is a nice sum and at first glance, and it may seem worth it to do the transfer. But, is it worth the risk of potentially incurring a higher revert rate if you are unable to pay off your balance before the promotion ends?
As with any financial product, run the numbers before you sign on the dotted line, and make sure the risk/reward ratio works in your favor.
Balance transfers are not always included.
Don’t assume every 0% APR offer is good for balance transfers. Nearly all of these offers are good for new purchases made on the card. But the same is not always true for balance transfers.
In other words, sometimes the 0% APR offer applies to balance transfers, sometimes it doesn’t. Before you consolidate your debt on a new card, check the terms and conditions carefully to ensure balance transfers are also eligible for the promotional rate.
Balance transfers can potentially hurt your credit score
Your credit score may take a hit when you open a new card if your new balance pushes its credit utilization percentage over 30%. In other words, those with high credit scores tend to keep credit card balances under 30% of their maximum credit limit.
Credit score considerations:
In order to minimize the risk of running up debt, many people close their old accounts after the balance transfer is completed. However, closing accounts could hurt your credit score.
Closing accounts with zero balance will actually raise your overall credit utilization percentage – the amount of balance you carry versus the amount of credit you have available to you. So, closing your old card could potentially hurt your credit score.
That’s not all.
Closing an old account may hurt your length of credit history, which can also negatively affect your score.
In other words, closing your first credit card account may hurt the length of credit history and, consequently, your score. Conversely, closing a more recent account would likely have little to no effect on your score.
Bottom line: if you aren’t planning on applying for new credit any time soon, you probably shouldn’t worry about the credit hit too much. Paying off debt, and staying out of debt, are the bigger, more important goals here.
Late payments can kill your APR
Sadly, that enticing 0% promotional interest rate can be lost in the blink of an eye. All it takes is one late payment.
Read the disclosures carefully to make sure you understand the terms of a credit card offer. The card issuers often have the right, to not only end the introductory period, but also to hit you with a hefty penalty APR, often in the neighborhood of 30%.
You are exposing yourself to potentially more debt
As I mentioned before, banks are betting that you won’t be able to resist making more purchases and racking up more debt. If you’re going to do a balance transfer, vow to yourself you are doing so strictly to help you pay off your debt.
Cut up your cards, or hide them in a safe place, so you won’t be tempted to use them for impulse buys.
Should you get a balance transfer credit card?
Transferring your debt to a 0% interest credit card only makes sense if the purpose is to pay down debt.
Even then, there are pros and cons to consider when deciding if you should or should not get a balance transfer credit card.
If you’re considering transferring a credit card balance for any other reasons besides saving money and getting out of debt faster, you probably should not do it. Don’t fall into the trap of thinking the balance transfer is a magic fix to get your finances back on track. If you don’t have a plan to pay down debt and stay out of debt, a balance transfer card will probably be counterproductive and lead to more debt.
However, when it’s done the right way as part of a debt reduction plan, a balance transfer credit card can be a very effective tool to save money and pay off debt faster.
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