Dealing With Debt
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Debt Management
Balance Transfer Credit Cards
If you’re managing a lot of credit card debt across several different cards, a balance transfer credit card can be a lifesaver. It might seem crazy to take out another credit card while already-saddled with debt, but balance transfer cards grant the ability to consolidate high-interest debt onto a single card with a lower interest rate, helping you save money and pay down your debt faster. Like any financial tool, they have advantages and disadvantages. Let's explore, and help you decide if a balance transfer credit card is right for you.
What is a Balance Transfer Credit Card?
A balance transfer credit card allows you to move existing debt from one or more credit cards to a new card with a lower interest rate, often as low as 0% APR for an introductory period. This can be a smart move if you're paying high interest on your current balances and want to reduce your overall debt more quickly.
Pros of Balance Transfer Credit Cards:
The most significant advantage of a balance transfer is the potential to save on interest payments. With introductory rates as low as 0% for a specified period (often 6-18 months), you can focus on paying down the principal balance without accruing additional interest.
Consolidating multiple debts onto one card can simplify debt service. Instead of juggling several payments, you make a single monthly payment, making it easier to keep track of your debt and avoid missed payments.
With no interest accruing during the introductory periods of these cards, more of your payment goes towards reducing the principal balance. This means you can pay off your debt faster, provided you stick to a disciplined repayment plan.
If you pay off your balance within the introductory period, you could even reduce the overall cost of your debt. Sometimes, significantly. Even after the introductory period ends, a card with a lower ongoing APR can still offer savings compared to higher-interest cards.
Cons of Balance Transfer Credit Cards:
First, there is a sizeable fee to perform a balance transfer. Any and every balance transfer card will charge a fee to use this feature, typically 3-5% of the transferred amount. Depending on the size of your debt, this could be a substantial sum. Make sure to do your calculations well in advance, and determine whether or not the balance transfer fee is actually less than the interest you’d otherwise pay.
Also, the 0% introductory rate is just that - introductory, and temporary. Once the period ends, the interest rate could, and often does, increase significantly. If you haven't paid off the balance by then, you could end up paying high interest on the remaining debt, in addition to the balance transfer fee appended to your existing debt.
Applying for a new credit card can also temporarily lower your credit score due to the hard inquiry. Since balance transfer cards know that their demographic tends to struggle with debt, they almost always perform a hard inquiry. Additionally, if you max out the new card's credit limit with your transfer, it can negatively affect your credit utilization ratio.
Finally, while transferring your balance might give you a temporary sense of relief, it's important to avoid accumulating new debt on the old cards. Without careful management, you could end up with more debt than you started with. That’s why we recommend closing out any account that’s had its balance transferred. You’ll take a temporary hit to your credit score for doing so, but if a line of credit proves unmanageable, it must be closed.
Is a Balance Transfer Credit Card Right for You?
Balance transfer credit cards can be a valuable tool for managing debt, but they're not a one-size-fits-all solution. If you have a solid repayment plan and are committed to paying off your balance within the introductory period, a balance transfer card could help you save money and get out of debt faster. However, if you're unsure about your ability to pay off the debt or if you're prone to accumulating new debt, it may not be the best option.
By weighing the pros and cons and understanding your financial situation, you can make an informed decision that aligns with your goals and helps you take control of your debt.
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