Pros and cons of balance transfers

Erica Sandberg
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Erica Sandberg
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What are the advantages and disadvantages of a balance transfer? On the surface, the decision to shift existing and expensive debt to a new balance transfer credit card can seem easy. After all, the majority of these products will not charge any interest on the transferred amount for a specified number of months, and many come with a whole host of other compelling benefits. Yet, these financial can also have some downsides to consider. Is a balance transfer the right move for you? Let’s break down the pros and cons.

Pros of balance transfers

Can save you a lot of money

The strongest case for a balance transfer credit card is that most come with a 0% APR introductory period which can save you from paying an overabundance in interest charges. For example, if you owe $5,000 to your current card that has a 26% APR and pay $400 towards your balance each month, the total interest would be $781. However, if that same debt were absorbed by a balance transfer card offering 0% APR it would only cost you the flat transfer fee (typically 2% to 5%). If the fee were 3% it would be $150, resulting in a $731 discount if you pay your balance in full before the introductory 0% APR period expires.

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Reduces debt repayment time frame

When interest is assessed, part of your payment is applied to the principal while the other portion goes toward the financing fees. That elongates the repayment process. A balance transfer credit card with 0% APR lowers that time frame. The $5,000 credit card balance with 26% APR and a $400 fixed payment would take 15 months to pay off. With the 0% APR balance transfer card (and a 3% transfer fee), all of your payment goes to the principal, resulting in a payoff time of 13 months. It slashes two months from your get-out-of-debt plan!

Gives you breathing room

Maybe you want the option to make low minimum payments for a while without worrying about interest being added to your account. You have that flexibility with a balance transfer card. As long as you delete the debt in full by the final month of the intro 0% APR period, you can avoid interest charges.

Can improve your credit

If the balance on your current credit card is high compared to its limit, your credit score may be losing points. When you pay the debt off with a new credit card, you open that credit utilization ratio. That can increase your credit score.

Another credit card to use

If you only have one credit card and its maxed out, you would have to pay it down before you can use the card as a payment tool. When you transfer the balance to the new card, the original can be used for transactions again.

Welcome bonus

Some balance transfer credit cards that offer 0% APR also come with a welcome bonus for new cardholders. With that, you not only have free financing on the transferred debt for a period of time, but a large amount of cash, points, or miles after using the card for purchases and then meeting the minimum spend.

Rewards programs

There are also ongoing rewards programs that many balance transfer cards offer to consider. With each charge you make you can earn cash, points, or miles. As long as you pay the charges in full by their bill date, you’ll come out ahead with rewards. If you started with a plain vanilla card, this could be your chance to upgrade.

Cons of balance transfers

May not be available if you have bad credit

Balance transfer credit cards are generally not available to people who have bad credit. If you have a history of late payments, collection accounts, bankruptcy, and excessive debt, you may be out of luck.

Balance transfer fee

Almost all credit card balance transfers charge a transfer fee, which will be added to your debt. For larger balances that can be a substantial sum. For example, if you transfer $10,000 and the fee is 5%, you’re looking at $500 added to the amount you owe. A balance transfer might not be worth the trouble if are able to pay the account off quickly.

Easy to accumulate more debt

It can be very tempting to pick up the original, but now empty, card again and start charging without making your payments in full. If you do, you may end up over your head and then fall behind on payments. With high debt and delinquencies on your credit report, you might not be able to get another 0% APR deal.

Have to manage another account

Every credit card you have needs to be carefully managed. That means you have to review your statements, check your spending, and keep the account in good standing. If you’re looking to simplify your life, a new credit card – even one that is helping you out financially – adds to your credit management plate.

Can unnecessarily elongate debt repayment

A balance transfer can be the easy way out of paying interest, but it can also extend debt deletion. If you have the ability to pay the debt off quickly, it’s usually the best plan. Not only will you have all the money you would be sending as payments to use for other things, you won’t have to think about paying the debt in full before the rate goes up.

Regular rate may be higher than the original account

Make sure you read all of the terms in the contract, because once the 0% APR offer expires, the regular rate will go into effect. If the rate is higher than it is on your original account and you don’t delete the balance, you could pay more than you expect in the end.

Promotional rate can expire early

If you miss a payment or exceed your credit limit, some credit card issuers will automatically pull the 0% APR and revert to the regular interest rate. Therefore, all your hard work to transfer your balance and enjoy the benefits could be for nothing.

The bottom line on balance transfer credit cards

As you can see, the pros and cons of balance transfer credit cards are extensive. Although these products can come with a few potential downsides, they can work very well when you choose the right card and you are committed to the process.

Erica Sandberg
Cardratings Contributor

Erica is a personal finance reporter and writer. Her passion is helping individuals, families and small business owners understand money and credit so they can achieve their goals. Erica has contributed to countless media outlets, hosted the television program “Making it in San Francisco” and...Read more

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