I’ve written in the past about using a balance transfer in order to consolidate your debt or lower your interest rates. It is a method that I often hear about from my friends and clients. Basically, you transfer the balance of one credit card to another credit card. This is usually done to take advantage of low or no interest offers. Sounds like a great deal, right? It can be! But it’s important to know both the pros and cons of this approach before you dive in.
Why might someone want to do a balance transfer? Well, most people do it in order to take advantage of low or no interest fees while they pay down their debt. There are many credit cards out there that allow you to do this.
Low or No Interest Fees: The whole point of doing a balance transfer is to take advantage of low or no-interest offers. That means that for a certain period of time, you can pay down your debt without paying any (or little) interest on it. This saves a lot of money and can make it easier and more manageable to pay off your debt.
More Time: Most introductory offers last from about 12 to 18 months. That means that you get up to a year and a half to pay down your debt without paying interest on it.
Consolidation: You can often transfer more than one balance onto a new card during a balance transfer. This can help you to consolidate your debt if you have multiple credit cards. Having one bill to pay each month, rather than multiple, it can make things a lot easier to manage.
Origination Fees: Credit card companies aren’t just giving you a zero-interest offer out of the goodness of their hearts. You do have to pay a fee in order to make the balance transfer. This fee can typically range between 3 and 5 percent of the balance being transferred. Depending on the amount of debt you have, that can add up to a lot of extra money for you to pay back. Do the math to see if the interest you’d be otherwise paying will be more than the origination fee so that it’s worth your while.
Time Limit: Just as it’s a good thing to have up to 18 months to pay off your credit card debt, this is still a time limit. If you have a lot of debt, you might not be able to pay it all off that quickly. After the introductory period, the interest rates will go up to normal rates, which can be as high as 25 percent. If you haven’t paid off all your debt by then, you’ll be paying interest on it again. Or, you have to do another balance transfer, which can be time consuming and expensive.
More Credit: A danger of balance transfers is that you’ll continue to use the credit card after you’ve paid off your debt. That risks building up the debt again. If you know that you struggle with spending and debt, it might be better to consolidate with a personal loan and cut up your credit cards. Of course, if you do the balance transfer and then cut up the card itself, you’ll prevent yourself from using it.
Impact on Credit Score: Opening and closing credit accounts can hurt your credit. Whenever there is an inquiry into your credit, that can ding your credit score.
It’s clear that there are good things and bad things about doing a balance transfer. This is true for almost any financial decision you can make. The key is to weigh the pros and cons and decide what makes the most sense for you and your financial situation. Good luck!
Certified Financial Education Instructor. Feminist and financial coach for women. Founder of Money Circle.