The Pros & Cons Of Balance Transfers

If you’re carrying credit card debt and paying on time, chances are you also regularly receive offers from various financial institutions offering you balance transfer deals. If you’re serious about paying off your debt and have fixed whatever issue caused you to accumulate the debt in the first place, then it can seem like a no-brainer — using balance transfer deals can be a key step in getting to zero debt sooner. But before you pull the trigger to transfer your balance to a new card, make sure you’ve considered all the potential pitfalls first.

Advantages of balance transfers

  • Lower interest rate — The lower your rate, the more impact your payments will make toward your balance. Just make sure you know you’ll qualify for the low interest rate before committing to the transfer or you could end up with a higher rate than your original card.
  • Accelerated debt pay-off — To determine exactly what the impact of lowering your interest will have on your timeline, plug your info into the Debt Blaster calculator to confirm.
  • Pay less interest over time — You can also use the Debt Blaster to calculate how much you’ll save in overall interest, but you also need to add in any balance transfer fees. Make sure you do the math before committing to make sure the savings are worth the potential risks.
  • Consolidation of balances — Balance transfers can also help you to consolidate several small balances onto one lower-interest card, which means you’ll have less hassle and less chance you’ll forget to make a payment.

Potential disadvantages of balance transfers

  • Transfer fees — Most balance transfer offers include some type of fee, which is typically 1 – 3% of the balance you’re transferring. For example, if you’re transferring a $3,000 balance to a card with a 3% transfer fee, you’ll be starting with a balance of $3,090. Make sure you factor that in to any interest savings calculations you perform. If you can find an offer with no transfer fee and a lower interest rate, take it! (check the fine print first to make sure there isn’t some other catch to make up for it though)
  • Promo rates —  Keep in mind that balance transfer rates are typically lower than new purchase rates, so if you are using the new card to shop while trying to pay down your balance (which is a very slippery slope anyway), you’ll most likely negate the interest savings of the balance transfer. A best practice is not to “comingle” your debt — keep the cards you’re using for low balance transfer rates strictly for paying down balances.
  • Rate expiration dates — Many times the low rate that card companies offer to entice you to transfer your balance has an expiration date, usually between 8 and 24 months after you open the card. That’s fine, as long as your plan includes that end date so that you can either have the balance paid off or transfer it to another card.
  • Type A personality traits required — Managing the debt payoff via balance transfer does require a bit of attention to detail, so just be aware that if you’re not Type A like me, you’ll probably need to put some stopgaps in place like setting multiple reminders on your calendar and phone and even asking a friend or family member to make sure you come back and reassess your situation at least a month before any promo rates expire.
  • Could dig you deeper — The reason that banks offer these deals in the first place is because they know that many people, despite their best intentions, will simply use this new card to accumulate even more debt, rather than pay it off as would be the best plan. When you open a new card to transfer the balance, consider cutting up your old card to avoid the temptation to accumulate another balance on that fresh zero statement. You don’t have to close the card (that could be a hit to your credit), but cut it up or give it to someone you trust for safe-keeping.
  • Credit score ding — It’s true that applying for credit does cause your score to take a temporary dip, as will closing old cards to make sure you aren’t tempted to run the balance up again, but if your goal is to get out of debt faster and this achieves it, worry less about your credit score (which will rebound) and more about saving money in unnecessary interest and getting out of debt ASAP.

One final thing: make sure that you’re doing balance transfers strictly as part of a debt pay-off plan instead of as a way to accumulate even more debt. I’ve worked with people before who found themselves deeper and deeper over their heads in debt when they started playing musical credit cards with their balance. It’s important that it’s part of a debt pay-off plan and not just a way to stay afloat.

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