Balance Transfers: Pros, Cons & Tips to Reduce Debt

Name: Balance Transfers: Pros, Cons & Tips to Reduce Debt
Item: Balance Transfers: Pros, Cons & Tips to Reduce Debt
Author: Doug Milnes, CFA

Balance transfers can reduce interest costs and consolidate debt, but beware of transfer fees and higher rates post-promotion.

By Doug Milnes, CFA

Reviewed by Brett Holzhauer, CPFC

Updated: November 8, 2024

Advertising & Editorial Disclosure

A balance transfer allows you to consolidate your debts to a single account, often a credit card, and benefit from a lower interest rate. This can help you save money on interest payments. However, note that the lower interest rate is usually an introductory offer that lasts for a limited time, generally between six and 18 months.

One of the best advantages of a balance transfer is a low introductory interest rate. Typically, this promotional offer features 0% APR, giving cardholders the chance to skirt around interest charges for a set period. Because you're saving on interest, more of your payment goes towards the principal, making it faster to pay off your debt.

The biggest obstacle to watch out for is accumulating more debt. If you don't pay your balance in full at the end of the introductory period, you'll incur higher interest charges on the remaining amount. You might also rack up new debt on your old card and on your new balance transfer card. In short, use a balance transfer card to get out of debt, not to finance further debt.

KEY TAKEAWAYS

Balance transfers can offer a financial breather by reducing interest on existing debt, potentially saving you money if you can pay off the balance within the promotional period.
You risk accruing more debt if you don’t pay your balance at the end of the introductory period or use your new available credit to make unnecessary purchases.
To benefit the most from a balance transfer card, pay more than the minimum amount each month, avoid racking up new debt and make the transfer as soon as possible.

Pros of Balance Transfers

Balance transfers can work wonders if you take advantage of its benefits, which include the following:

Lower Interest Rates

The best thing about moving your debt from one card to another is that you might get a lower interest rate. Many balance transfer cards offer a 0% interest rate at the start. If the interest on your current credit card is high, transferring the balance to a card with a lower rate can save you a significant amount of money over time.

Consolidation of Debts

Another feature of a balance transfer is the ability to consolidate multiple debts into one place. This can simplify your debt management because you only have to worry about making one payment each month.

Opportunity to Improve Credit Score

Done right, balance transfers can help you improve your credit score. By keeping your utilization low and making timely payments on your new card, you're demonstrating responsible credit behavior, which can positively affect your credit score.

Cons of Balance Transfers

Balance transfers are a good strategy for managing debt, but remember that, like any debt management strategy, they also have disadvantages.

Risk of Higher Debt

If you're not disciplined, a balance transfer can lead to higher debt. Once the balance is moved, you might be tempted to spend more on your old card, potentially leading to more debt than you started with.

Balance Transfer Fees

The balance transfer credit cards charge a fee typically between 3% to 5% of the transferred amount. This upfront cost can cancel out some of the savings from the lower interest rate.

Temporary Dip in Credit Score

Initially, applying for a balance transfer might have a negative effect on your credit score. Applying for a new credit card leads to a hard inquiry on your credit report, which can temporarily lower your score.

Requires a Fair or Better Credit Score

You'll typically need at least a fair credit score to qualify for a balance transfer card, which is at least a 580 credit score on the 300–850 scale.

MONEYGEEK EXPERT TIP

If you miss a payment, your promotional interest rate may expire early. Set up automatic payment of the minimum amount due to avoid late fees and interest rate surprises. — Lee Huffman, credit card expert at BaldThoughts.com

Maximizing Balance Transfer Savings

How much you can save with a balance transfer depends on the balance you carry, the interest rate of your old card, the balance transfer fee and the monthly payment you'll make. For example, you have a $5,000 balance on an 18.99% credit card, and you transferred it to a credit card that offers a 0% introductory APR for 18 months. With a 3% balance transfer fee and a $300 monthly payment, you'll save about $700. The amount you save is the interest charge of the old card minus the balance transfer fee. This balance transfer calculator can help you determine specifics.

But if you continue to accumulate charges on your old card after the transfer or start piling up expenses on the new one, you may find yourself sinking deeper into debt. Additionally, if you're unable to pay off the transferred amount before the introductory period ends, you could be hit with a higher interest rate on the remaining balance.

How to Choose a Good Balance Transfer Credit Card

Many card issuers offer balance transfers, but the best balance transfer credit cards have the following features:

Low or 0% Introductory APR

Choose a credit card that features a low or zero percent introductory APR, preferably one that extends this offer for a span of 12 to 18 months, to reduce your debt without accruing significant interest. If you have an outstanding credit rating, you may be eligible for a card with a 21-month introductory period.

Low Balance Transfer Fee

Take into account the cost of the balance transfer, typically ranging from 3% to 5% of the amount you're moving. Be sure to calculate this fee as you consider your potential savings.

High Credit Limit

Check the credit limit of the new card to see if it can accommodate the debt you plan to move. Additionally, read the terms and conditions because some cards restrict the transferable amount, even if your credit limit is higher. For instance, AMEX sets a cap on transfers at either your credit limit or $7,500, whichever is lower.

Low Post-Introductory Interest Rates

Review the ongoing APR that will apply once the introductory period ends. A strong credit score may get you a lower APR after the initial offer, which is important if you anticipate carrying a balance past the promotional period.

You can also get balance transfer cards that offer additional benefits like earning cash back or points, or a zero percent introductory APR on new purchases. This is great if you intend to use the card for everyday expenses or if you're anticipating a large purchase.

MONEYGEEK EXPERT TIP

During a high-interest rate environment like we have now, you may consider holding your funds to pay a monthly bill in a high-yield savings account. For example, I recently purchased a new air conditioner for my home on a 0% balance transfer card. I have the money to pay it off today, but I’m holding it in a high-yield savings account. So, if you can get ahead of your debt, you could potentially find a delta between your cash and the card's 0% offer. — Brett Holzhauer, contributing expert for MoneyGeek

Considerations Before Balance Transfer

A balance transfer could be a strategic financial move if used wisely. First, assess whether it aligns with your financial situation and goals before moving forward. Here are some considerations to help you decide:

1
Are you carrying high-interest debt?
Because you're transferring your old debt to a credit card with a low or 0% rate, you'll likely save on interest.
2
Can you pay off the balance within the introductory period?
You can save a lot if you can pay your balance before the introductory period. Afterward, you'll have to pay interest on the remaining balance.
3
Are the balance transfer fees worth it?
Calculate whether the cost of the transfer fee is less than the amount you'd save on interest to avoid unnecessary fees.
4
Are you disciplined in your spending habits?
A balance transfer can be a helpful tool, but it requires self-discipline. It's important to resist the temptation to rack up more debt on the old card once it's been paid off.
5
How much debt are you carrying?
Know if you can transfer the entire amount to the new credit card. While cards offer high credit limits, it may not be enough to cover your entire debt.

Alternatives for Credit Card Debt Management

Balance transfers can be a great tool for managing credit card debt, but they aren't the only option. It's important to consider all your choices and find the best strategy for your unique financial situation. Here are some potential alternatives:

Alternative	Description
Debt consolidation loan	These are personal loans used to pay off multiple debts, including credit card balances. You then repay the loan in fixed monthly payments. It can be a great option if you can secure a lower interest rate than your current credit cards.
Debt management plan	Nonprofit credit counseling agencies can help you set up these plans. They also negotiate with your creditors to lower interest rates and waive fees, and then you make a single payment to the agency each month.
Credit card hardship program	Some issuers offer these programs to help struggling cardholders. They may lower your interest rate, reduce your minimum payment or even temporarily pause your payments.
Reducing spending to pay off debt	If you can tighten your budget and cut down on unnecessary spending, you can put more money toward paying off your credit card debt. This approach can be very effective. It not only saves you money on interest over time, but it also helps you clear your debt more quickly.

FAQ: Pros and Cons of Balance Transfers

When it comes to balance transfers, we understand that you may have a few questions. That’s why we answered some of the most common queries to help you navigate your financial decisions.

What is a balance transfer?

A balance transfer involves moving the debt from one credit card to another, typically to take advantage of a lower interest rate. This strategy can be helpful in managing credit card debt, but first, one must understand the terms and potential fees involved.

Is it a good idea to transfer credit card balances?

Whether transferring credit card balances is a good idea depends on your circumstances. If your current cards carry high interest rates, moving to a card with a lower rate could be financially the best move, aiding in quicker debt repayment and cost savings. However, the success of such a strategy hinges on careful management of the new balance to dodge potential drawbacks.

Is there a downside to balance transfers?

Yes, potential downsides to balance transfers include balance transfer fees, higher interest rates after the introductory period and the possibility of getting into more debt if you don't manage your spending habits properly.

Should you open a new credit card to transfer a balance?

You may consider getting a new credit card to transfer a balance in order to take advantage of an introductory 0% APR offer. But this is usually only recommended if you plan to pay off the entire amount or bring it down significantly before the promotional period ends. Any outstanding balance after the promotion expires starts accruing interest. If you have a considerable balance on a high-interest credit card, you may want to consider transferring it to a card with a lower APR (after accounting for any possible balance transfer fees).

Is it better to transfer credit card balances than to continue paying high-interest charges?

If you have a sizable outstanding balance on a high-interest credit card that you don’t plan to pay off within the next few months, transferring its balance to a card with a lower APR or one with a 0% APR offer might work better than continuing to pay high-interest charges on your existing card.

Should you use a balance transfer offer?

Consider a balance transfer card if you expect to pay off or greatly reduce the amount during the promo period, as remaining balances post-promo accrue interest at the standard rate. Minimum payments won't lower the balance much, and remember that the starting balance will reflect transfer fees.

Is it worth paying a balance transfer fee?

Paying a balance transfer fee could make sense if you're confident you'll reduce or clear the balance during the 0% APR period. Ensure the APR difference between the old and new card outweighs the transfer fee, such as a 3% fee, for it to be beneficial — the larger the APR gap, the more you stand to save.

When paying off credit cards using balance transfers, is it better to pay them off before the introductory APR runs out or pay off other cards first?

Try to include your high-interest credit card debt in your balance transfer. If that's not possible, look at the regular APR that will apply to any outstanding balance of your balance transfer once the introductory period ends. If it's lower than the APR of your high-interest rate cards, you may rely on the debt avalanche method and pay them off first. If the regular APR of your balance transfer card is higher than that of your other high-interest-rate cards, consider paying off the transferred balance first.

Can you get a balance transfer card with no balance transfer fee?

Credit cards offering a 0% introductory APR with no balance transfer fee are rare. Credit union cards, such as the Navy Federal Platinum Credit Union card, offer balance transfers without a balance fee, but you have to be a member to qualify.

Credit Cards

Do Balance Transfers Hurt Your Credit Score?

Credit Cards

Actual Savings With Balance Transfer

About Doug Milnes, CFA

Doug Milnes is a CFA charter holder with over 10 years of experience in corporate finance and the Head of Credit Cards at MoneyGeek. Formerly, he performed valuations for Duff and Phelps and financial planning and analysis for various companies. His analysis has been cited by U.S. News and World Report, The Hill, the Los Angeles Times, The New York Times and many other outlets.

Milnes holds a master’s degree in data science from Northwestern University. He geeks out on helping people feel on top of their credit card use, from managing debt to optimizing rewards.

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sources

American Express. "0% Intro APR." Accessed November 8, 2024.

*Rates, fees or bonuses may vary or include specific stipulations. The content on this page is accurate as of the posting/last updated date; however, some of the offers mentioned may have expired. We recommend visiting the card issuer’s website for the most up-to-date information available.
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Balance Transfers: Pros, Cons & Tips to Reduce Debt

Pros of Balance Transfers

Cons of Balance Transfers

Maximizing Balance Transfer Savings

How to Choose a Good Balance Transfer Credit Card

Considerations Before Balance Transfer

Are you carrying high-interest debt?

Can you pay off the balance within the introductory period?

Are the balance transfer fees worth it?

Are you disciplined in your spending habits?

How much debt are you carrying?

Alternatives for Credit Card Debt Management

FAQ: Pros and Cons of Balance Transfers

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