Pros and Cons of Using a Balance Transfer To Pay Off Credit Card Debt

·5 min read
mapodile / Getty Images
mapodile / Getty Images

A balance transfer credit card allows you to transfer the debt balance from other credit cards onto a single card. While there is typically an up-front fee, most balance transfer cards offer a low interest rate for a specific length of time, allowing you to save money on interest while paying down your debt.

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You may need a decent credit score to apply for a balance transfer card, and there are stipulations for keeping your low rate. If you miss a payment, you may be on the hook for paying interest on the balance of your card. However, if you have a debt payoff plan and are looking to free up some cash flow, a balance transfer card may be a good idea.

Pros of Using a Balance Transfer Credit Card

Balance transfer cards are designed to help you pay off your debt quicker while paying less in interest. Here are a few of the pros to using a balance transfer card when paying off debt.

Lower Your Payments

Balance transfer credit cards typically have a promotional APR that lowers your interest rate for a set amount of time, and in turn, lowers your monthly payments. Some cards offer 0% interest for up to 12 or 18 months, and the minimum payment due is much smaller than high interest credit cards.

With a lower payment, you can focus the extra monthly cash flow toward paying off the card before the promotional rate expires.

Pay Off Debt Faster

Balance transfer cards ultimately exist to help you pay off your debt faster. If you have struggled to keep up with the payments on your high interest cards, or don’t have enough monthly cash flow available, moving your debt to a 0% balance transfer card can help.

If you have multiple high-interest credit cards, transferring your balance can shave months off your debt payoff, and save hundreds (or thousands) of dollars in interest.

For example: If you have a $10,000 credit card balance at 24% interest and are paying $350 per month, it would take you 43 months to pay off your debt, and you would pay over $4,900 in interest. With a balance transfer to a 0% card, even with a 3% transfer fee, you could pay off your debt in 32 months and only pay about $700 in interest.

Thus, in this scenario you can save over $3,900 in interest with a balance transfer card!

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Consolidate Multiple Debts

Many balance transfer cards let you transfer over multiple credit card balances. This allows you to consolidate your high-interest debt into a single card with a low promotional rate. You can vastly simplify your monthly payments and avoid getting behind by transferring all of your balances to a single card.

Cons of Using a Balance Transfer Credit Card

While balance transfer cards can help you pay off your debt quicker, there are some downsides you need to be aware of. Here are a few of the cons of using a balance transfer credit card.

The Balance Transfer Fee

Most balance transfer cards charge an up-front fee that is added to your debt balance. This fee usually ranges from 3% to 5%, and if you have a large balance to transfer, this can be a large fee.

For example: If you have multiple high-interest credit cards that add up to a $25,000 balance, paying a 3% balance transfer fee can add another $750 to your debt load.

While this may pale in comparison to your previous interest rate, you do need to account for the fee when considering a balance transfer card.

You Could End Up With a High Interest Rate

Balance transfer credit cards may offer a very low introductory credit interest rate, but if you don’t pay off the balance by the time the promotional rate ends, you may have a higher interest rate than your previous card. Some balance transfer cards actually charge higher rates than regular credit cards.

Plus, there are stipulations to keep your low promotional interest rates. On some cards, if you miss a single payment during the promotional period, you will be back-charged interest on your balance for the entire period, which will cost you a LOT more than your previous cards.

Therefore, you need a plan in place to ensure you can pay off your card balance in time, and avoid missed payment penalties on balance transfer cards.

You Might Stay in Debt

Transferring your debt from one credit card to another might relieve your debt payments a bit, but the truth is that you still have to pay off the debt. And if you don’t have a plan in place for paying off that debt balance, you might stay in debt — and actually end up paying more.

Before you choose a balance transfer card, you need to create a monthly budget, find out how much you can put towards debt payoff, and stick to the plan. You also need to really dig into the reasons you are in credit card debt in the first place. If it was a one-time life circumstance, that’s understandbale — but if you simply don’t track your spending and end up spending everything you make, a balance transfer card won’t help.

Bottom Line

Balance transfer credit cards can help you pay off your credit card debt faster, potentially saving you thousands of dollars in interest. If you have several high-interest credit cards, you can simplify your monthly payments by consolidating your credit cards onto a single balance transfer card. However, if you don’t change your spending habits and don’t have a plan in place for paying off your credit card debt, a balance transfer card might not help.

If you are looking to consolidate your credit card debt and save money at the same time, check out the top balance transfer credit cards and find one that fits your needs.

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This article originally appeared on Pros and Cons of Using a Balance Transfer To Pay Off Credit Card Debt