See the pros and cons of a balance transfer and avoid losing money!
A balance transfer is when you move your debt from one credit card to another with a lower interest rate. If you use it smartly, it can be a great way to get a handle on your debt and pay it off faster.
Everybody knows that paying off credit card debt is not easy, especially when you have to deal with high interest.
But what if you could just pause all those interest charges, then be able to pay off your balance and get rid of your debt?
That’s exactly why you could have with a balance transfer card. Let’s explore the pros and cons!
Pros of balance transfers
You can consolidate your payments
One option is to gather multiple credit card debts onto a single balance transfer card.
By doing this, your debts are consolidated into just one card, allowing you to manage a single monthly payment with only one due date.
This can greatly simplify your financial organization since you won’t have to worry about multiple dates and amounts each month.
You can save on interest
A major advantage of transferring your balance is the opportunity to pay less in interest.
Often, credit cards come with interest rates (APR) that can reach 28% or even higher. However, some balance transfer cards offer 0% interest for an initial period.
This allows the money you put toward paying off the debt to go directly to reducing the principal balance, rather than being eaten up by interest charges.
Transfer your debt to another credit card
If the high interest rates and unfavorable conditions of your current cards are bothering you, a balance transfer could be a good solution.
By getting a new card with lower interest rates and better terms, you can move your debt to a card that works more to your advantage.
Some of these cards also offer reward programs. However, it’s important to avoid accumulating new debt until the transferred balance is fully paid off.
Your credit score could get a boost
Your credit utilization ratio is simply how much of your available credit you’re using compared to your total credit limit.
It’s usually shown as a percentage and is calculated by dividing the total balance you owe across revolving credit accounts by the total credit limits on those accounts.
When your credit utilization is high—meaning you’re using a large portion of your available credit—it can drag down your credit score.
By opening a balance transfer card, you’ll increase your available credit while paying down your balance, all without accumulating additional interest.
This can reduce your credit utilization ratio and, in turn, help lift your credit score.
Cons of balance transfers
Balance Transfer Fee
When you transfer a balance, you’ll usually pay a fee of 3% to 5% of the amount you’re moving.
There’s often a minimum fee, and the lower percentage generally only applies if you make the transfer soon after opening the new credit card.
Temporary Low Interest Rate
The promotional interest rate only lasts for a limited time, and the length of that period can determine whether the balance transfer is worth the fees.
If you don’t pay off the transferred balance by the end of the promo period, your APR will increase, often to a much higher rate.
Most promotional periods on balance transfer cards range from 12 to 21 months.
Risk of Accumulating More Debt
If getting a balance transfer card makes you feel tempted to start using the old card(s) you just paid off, you could end up in even more debt—and likely at higher interest rates.
It’s important to know your spending habits, have a clear plan, and be disciplined about sticking to it.
High Credit Score Needed
To qualify for a balance transfer card, you typically need a good to excellent credit score. If you’re not quite there yet, you might want to consider a debt consolidation loan instead.
This could be a better option if you can secure an interest rate lower than what you’re currently paying on your other debts.
If this post interests you, we’d like to invite you to read our article and learn how to understand your credit card score.