Balance transfers are a lesser known and possibly underutilized aspect of some credit cards. They allow you to move debt from one high-interest card to another with a much lower annual percentage rate – even as low as 0% APR.
But what are the pros and cons of balance transfers, and should you rely on them to save money? Here’s what you need to know.
What is a balance transfer credit card?
Basically, a balance transfer credit card allows you to move your credit card debt from one account to another to pay a lower APR on the receiving card.
Several credit cards offer 0% introductory interest on balance transfers, so if you’ve built up a lot of debt on another card, you can transfer the amount to one of these cards and pay it off over time without stress. The introductory rate on these cards typically lasts 12 to 21 months, giving you plenty of time to reduce your overall debt burden.
Benefits of Balance Transfer Credit Cards
These are the main benefits of performing a balance transfer:
Interest savings
Balance transfer cards can save you significant amounts of interest. If you have a lot of high-interest debt piled on another card, a balance transfer can almost act as a get-out-of-jail-free card if done properly.
Naturally, you’ll want to pay off the debt on your new card before the interest accrues. Otherwise you may find yourself back at square one.
Pay off debts faster
By reducing or eliminating interest on your credit card balance, you can pay off your debt faster. This is because during the 0% APR period, your entire credit card payment is applied to the principal balance, rather than being eaten up by interest charges.
Consolidating debts
Credit card debt can cause additional stress if it is spread across multiple creditors. For example, many people owe money on various credit cards. Using a balance transfer credit card to consolidate your debts onto a single card at a lower rate can help lower your stress levels.
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You can then focus on paying off that one debt at your own pace, bringing you one step closer to being debt-free.
Disadvantages of Balance Transfer Credit Cards
Balance transfers can be a smart move, but there are some drawbacks to consider.
Transfer costs
Most balance transfer cards charge a balance transfer fee of 3% to 5% of the amount transferred. Therefore, you’ll want to do the necessary calculations and decide if transferring your balance is worth it or if it’s better to keep your debt where it is and pay it off from there.
There may also be a minimum balance transfer amount required, so read the fine print of any balance transfer card you’re considering.
Lower interest rates are temporary
The low APRs offered by balance transfer cards are always temporary. If you don’t pay off your debt by the end of the promotional period, your APR will revert to the higher standard rate, putting you back where you started.
Risk of falling further into debt
If you continue to accrue debt on your high-interest card after processing the balance transfer, you could end up in more debt than before. Balance transfers should be limited to emergency situations and not become routine. Practice smart spending habits to avoid a vicious cycle of constantly accumulating and transferring high-interest debt.
Higher credit score requirements
Finally, most balance transfer cards require a good credit score. If you have a lower credit score, a balance transfer card may be a non-starter and you may want to consider an alternative such as a debt consolidation loan.
Is a balance transfer worth it?
Credit card balance transfers can be the right financial choice in many situations, even taking into account transfer fees and temporary promotional periods. However, try not to get into the habit of relying on balance transfers. Ultimately, your goal should be to pay off your debt in full, not just move it around.
Check out TPG’s 10 Commandments on Credit Card Rewards to ensure your credit cards make money for you, not the other way around.
In short
Balance transfer credit cards can save you money by allowing you to transfer debt from a high-interest credit card to a credit card that charges only 0% APR for 12 months or more. They can also help you consolidate your debts into a single payment if you owe money on multiple cards.
But keep in mind that you need a good credit score to qualify for a balance transfer credit card. Other options include a debt consolidation loan.