Balance Transfers: Pros, Cons & Tips to Reduce Debt

ByDoug Milnes, CFA
Reviewed byBrett Holzhauer, CPFC

Updated: May 14, 2024

ByDoug Milnes, CFA
Reviewed byBrett Holzhauer, CPFC

Updated: May 14, 2024

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A balance transfer allows you to consolidate your debts to a single account, often a credit card, and benefit from a lower interest rate. This can help you save money on interest payments. However, note that the lower interest rate is usually an introductory offer that lasts for a limited time, generally between six and 18 months.

One of the best advantages of a balance transfer is a low introductory interest rate. Typically, this promotional offer features 0% APR, giving cardholders the chance to skirt around interest charges for a set period. Because you're saving on interest, more of your payment goes towards the principal, making it faster to pay off your debt.

The biggest obstacle to watch out for is accumulating more debt. If you don't pay your balance in full at the end of the introductory period, you'll incur higher interest charges on the remaining amount. You might also rack up new debt on your old card and on your new balance transfer card. In short, use a balance transfer card to get out of debt, not to finance further debt.

KEY TAKEAWAYS
  • Balance transfers can offer a financial breather by reducing interest on existing debt, potentially saving you money if you can pay off the balance within the promotional period.
  • You risk accruing more debt if you don’t pay your balance at the end of the introductory period or use your new available credit to make unnecessary purchases.
  • To benefit the most from a balance transfer card, pay more than the minimum amount each month, avoid racking up new debt and make the transfer as soon as possible.

Pros of Balance Transfers

Balance transfers can work wonders if you take advantage of its benefits, which include the following:

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    Lower Interest Rates

    The best thing about moving your debt from one card to another is that you might get a lower interest rate. Many balance transfer cards offer a 0% interest rate at the start. If the interest on your current credit card is high, transferring the balance to a card with a lower rate can save you a significant amount of money over time.

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    Consolidation of Debts

    Another feature of a balance transfer is the ability to consolidate multiple debts into one place. This can simplify your debt management because you only have to worry about making one payment each month.

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    Opportunity to Improve Credit Score

    Done right, balance transfers can help you improve your credit score. By keeping your utilization low and making timely payments on your new card, you're demonstrating responsible credit behavior, which can positively affect your credit score.

Cons of Balance Transfers

Balance transfers are a good strategy for managing debt, but remember that, like any debt management strategy, they also have disadvantages.

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    Risk of Higher Debt

    If you're not disciplined, a balance transfer can lead to higher debt. Once the balance is moved, you might be tempted to spend more on your old card, potentially leading to more debt than you started with.

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    Balance Transfer Fees

    The balance transfer credit cards charge a fee typically between 3% to 5% of the transferred amount. This upfront cost can cancel out some of the savings from the lower interest rate.

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    Temporary Dip in Credit Score

    Initially, applying for a balance transfer might have a negative effect on your credit score. Applying for a new credit card leads to a hard inquiry on your credit report, which can temporarily lower your score.

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    Requires a Fair or Better Credit Score

    You'll typically need at least a fair credit score to qualify for a balance transfer card, which is at least a 580 credit score on the 300–850 scale.

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MONEYGEEK EXPERT TIP

If you miss a payment, your promotional interest rate may expire early. Set up automatic payment of the minimum amount due to avoid late fees and interest rate surprises. — Lee Huffman, credit card expert at BaldThoughts.com

Maximizing Balance Transfer Savings

How much you can save  with a balance transfer depends on the balance you carry, the interest rate of your old card, the balance transfer fee and the monthly payment you'll make. For example, you have a $5,000 balance on an 18.99% credit card, and you transferred it to a credit card that offers a 0% introductory APR for 18 months. With a 3% balance transfer fee and a $300 monthly payment, you'll save about $700. The amount you save is the interest charge of the old card minus the balance transfer fee. This balance transfer calculator can help you determine specifics.

But if you continue to accumulate charges on your old card after the transfer or start piling up expenses on the new one, you may find yourself sinking deeper into debt. Additionally, if you're unable to pay off the transferred amount before the introductory period ends, you could be hit with a higher interest rate on the remaining balance.

How to Choose a Good Balance Transfer Credit Card

Many card issuers offer balance transfers, but the best balance transfer credit cards have the following features:

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    Low or 0% Introductory APR

    Choose a credit card that features a low or zero percent introductory APR, preferably one that extends this offer for a span of 12 to 18 months, to reduce your debt without accruing significant interest. If you have an outstanding credit rating, you may be eligible for a card with a 21-month introductory period.

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    Low Balance Transfer Fee

    Take into account the cost of the balance transfer, typically ranging from 3% to 5% of the amount you're moving. Be sure to calculate this fee as you consider your potential savings.

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    High Credit Limit

    Check the credit limit of the new card to see if it can accommodate the debt you plan to move. Additionally, read the terms and conditions because some cards restrict the transferable amount, even if your credit limit is higher. For instance, AMEX sets a cap on transfers at either your credit limit or $7,500, whichever is lower.

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    Low Post-Introductory Interest Rates

    Review the ongoing APR that will apply once the introductory period ends. A strong credit score may get you a lower APR after the initial offer, which is important if you anticipate carrying a balance past the promotional period.

You can also get balance transfer cards that offer additional benefits like earning cash back or points, or a zero percent introductory APR on new purchases. This is great if you intend to use the card for everyday expenses or if you're anticipating a large purchase.

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MONEYGEEK EXPERT TIP

During a high-interest rate environment like we have now, you may consider holding your funds to pay a monthly bill in a high-yield savings account. For example, I recently purchased a new air conditioner for my home on a 0% balance transfer card. I have the money to pay it off today, but I’m holding it in a high-yield savings account. So, if you can get ahead of your debt, you could potentially find a delta between your cash and the card's 0% offer. — Brett Holzhauer, contributing expert for MoneyGeek

Considerations Before Balance Transfer

A balance transfer could be a strategic financial move if used wisely. First, assess whether it aligns with your financial situation and goals before moving forward. Here are some considerations to help you decide:

1
Are you carrying high-interest debt?

Because you're transferring your old debt to a credit card with a low or 0% rate, you'll likely save on interest.

2
Can you pay off the balance within the introductory period?

You can save a lot if you can pay your balance before the introductory period. Afterward, you'll have to pay interest on the remaining balance.

3
Are the balance transfer fees worth it?

Calculate whether the cost of the transfer fee is less than the amount you'd save on interest to avoid unnecessary fees.

4
Are you disciplined in your spending habits?

A balance transfer can be a helpful tool, but it requires self-discipline. It's important to resist the temptation to rack up more debt on the old card once it's been paid off.

5
How much debt are you carrying?

Know if you can transfer the entire amount to the new credit card. While cards offer high credit limits, it may not be enough to cover your entire debt.

Alternatives for Credit Card Debt Management

Balance transfers can be a great tool for managing credit card debt, but they aren't the only option. It's important to consider all your choices and find the best strategy for your unique financial situation. Here are some potential alternatives:

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These are personal loans used to pay off multiple debts, including credit card balances. You then repay the loan in fixed monthly payments. It can be a great option if you can secure a lower interest rate than your current credit cards.

Debt management plan

Nonprofit credit counseling agencies can help you set up these plans. They also negotiate with your creditors to lower interest rates and waive fees, and then you make a single payment to the agency each month.

Credit card hardship program

Some issuers offer these programs to help struggling cardholders. They may lower your interest rate, reduce your minimum payment or even temporarily pause your payments.

Reducing spending to pay off debt

If you can tighten your budget and cut down on unnecessary spending, you can put more money toward paying off your credit card debt. This approach can be very effective. It not only saves you money on interest over time, but it also helps you clear your debt more quickly.

FAQ: Pros and Cons of Balance Transfers

When it comes to balance transfers, we understand that you may have a few questions. That’s why we answered some of the most common queries to help you navigate your financial decisions.

What is a balance transfer?
Is it a good idea to transfer credit card balances?
Is there a downside to balance transfers?
Should you open a new credit card to transfer a balance?
Is it better to transfer credit card balances than to continue paying high-interest charges?
Should you use a balance transfer offer?
Is it worth paying a balance transfer fee?
When paying off credit cards using balance transfers, is it better to pay them off before the introductory APR runs out or pay off other cards first?
Can you get a balance transfer card with no balance transfer fee?

About Doug Milnes, CFA


Doug Milnes, CFA headshot

Doug Milnes is a CFA charter holder with over 10 years of experience in corporate finance and the Head of Credit Cards at MoneyGeek. Formerly, he performed valuations for Duff and Phelps and financial planning and analysis for various companies. His analysis has been cited by U.S. News and World Report, The Hill, the Los Angeles Times, The New York Times and many other outlets.

Milnes holds a master’s degree in data science from Northwestern University. He geeks out on helping people feel on top of their credit card use, from managing debt to optimizing rewards.


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