Are balance transfers worth it? They can be in some situations, but it depends on how you handle them. So if you’re thinking of doing a balance transfer, there are things you need to know first.
(If you’re not already familiar with them, you can find out more about what balance transfers are here.)
Don’t do a balance transfer unless you fully understand them, including their pros and cons. Because they may or may not be worth it, and there’s a bit of a catch.
So how do you tell if balance transfers are worth it when you’re paying off debt? Start by reviewing some of the pros and cons.
Pros of Balance Transfer Offers
We’ve already mentioned the biggest pro: lower interest rates. If you can transfer high interest debt to a card with a low or 0% interest rate, the debt will cost you less to repay.
You should also be able to repay it faster, if you stay focused on paying it off in a timely manner.
Transferring balances between two credit cards means less responsibility than juggling multiple bills every month. And not taking out a debt consolidation loan can be a pro too.
Of course, if you’re looking for ways to pay less interest on your credit cards, they probably sound appealing. You might also be tempted to use balance transfers as a way to pay off debt faster. But there are downsides too that may mean a balance transfer isn’t worth it for you.
Let’s go over the cons next, which is where the catch comes in.
Cons of Balance Transfers
There are several cons to doing balance transfers:
You need excellent credit. You may not qualify for a balance transfer if you don’t have excellent (or sometimes good) credit. There could also be some other things that cause the creditors to deny your request for a balance transfer, like being over extended financially or having high balances on multiple cards.
There are fees to transfer balances from one card to another. On average, the fees are 3%-5% of the amount you’re transferring. So for example if you transfer $3000, it might cost you $90-$150. But it could be higher or lower too. Check the terms of the card you’re thinking of using.
You’ll be on the hook for the fees no matter what if you start a balance transfer. So you’ll have to weigh whether or not balance transfers are still worth it after you take fees into account.
Late payments can cost you. As with other cards, you’ll be charged a fee if you pay late. But if you’ve got a low intro APR, a late payment can cost you a whole lot more. That’s because you could lose your low promo rate and get charged a new, higher penalty APR instead.
The low or 0% intro period expires. Nothings lasts forever, and that includes introductory periods. For example, some cards offer a 0% intro APR on balance transfers for 12-18 months, but you have to do the balance transfer soon after opening the card. Then when the intro period is up, the interest rate goes way up. The new higher rate will apply to anything you still owe. So you need a plan to pay off what you owe with before the intro period expires.
Using balance transfers can make things worse. One big problem with “paying off” one credit card by moving it to another is that you feel like you paid it off. But you only moved what you owe around.
This is a problem because you feel relief when nothing’s really changed. You may keep on doing whatever you did to build up the debt in the first place. And if you don’t stop using the old card, you could end up owing even more. So it’s smarter to have made some progress with REALLY paying off debt before using this type of offer.
Balance transfers are not a way to get out of debt. They can be part of an overall strategy towards paying off debt, but they’re not a way to do so by themselves. You need to be on your way to debt freedom already.
Meaning you’ve stopped borrowing, have an emergency fund in place, and are making good progress before doing a balance transfer. Once you’re making progress like that, then it’s great to also look for ways to pay less interest.
Questions to Ask If You’re Thinking of Doing a Balance Transfer
If you’ve weighed the pros and cons and decided that a balance transfer is worth it in your case, ask these questions as well:
- Am I able to make payments on time? If you can’t, then a balance transfer will most likely hurt your credit score and it may be better to pay off the debt using other means.
- What is the interest rate on the new card?
- How long will it take me to repay what I owe with my balance transfer? Will I be able to pay it off before the intro period is up?
- Is there a penalty APR?
- How quickly do I have to get the balance transfer done?
Who Can Balance Transfers Work Well For?
Balance transfers can work well for people who are are already making progress with paying off debt. They may help make it easier to do that faster as part of your overall plan.
Who Should Avoid Balance Transfers?
Transfers are not for those who aren’t able to to make ends meet or who have trouble with impulse spending. And they shouldn’t be used when money is tight.
They’re also not a solution if you have no plan for how to pay off the balance within the time limits. (Or without racking up more debt or interest.)
The Bottom Line
Balance transfers are worth it if they will save you money, you can pay off your debt within the introductory period, and the pros outweigh the cons. (And you are in good financial shape otherwise.)
They can help you spend less on interest charges and pay off debt faster.
But they come with fees that may make them not worth it in some cases. Such as if things go wrong, or if you don’t yet have practice with managing your money well.
Knowing yourself, planning ahead, and fully understanding the pros and cons are key.