Balance Transfers: Pros, Cons & Tips for Debt Reduction

Dealing with credit card debt can be a daunting task, and you might be considering a balance transfer as a way to handle it. But, are balance transfers worth it? It's important to understand all aspects before you make a move.

We'll explain the pros and cons of balance transfers to give you a clear perspective on whether this strategy can improve your financial health or if there are potential pitfalls you should be aware of. With this analysis, you’ll be able to make an informed decision.

Before you decide to go for a balance transfer, it's crucial to understand both its potential benefits and drawbacks so you can have a good idea about what this financial strategy entails.

• Potential for 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 come with an offer of 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.
• Consolidation of Debts: Balance transfers allow you to consolidate multiple credit card debts into one place. This can simplify your debt management, as you only have to worry about making one payment each month.
• Opportunity for Credit Score Improvement: If managed correctly, balance transfers can lead to credit score improvement. By keeping your use low and making timely payments on your new card, you're demonstrating responsible credit behavior, which can positively affect your credit score.

• Balance Transfer Fees: Most credit cards charge a fee for balance transfers, typically between 3% to 5% of the transferred amount. This upfront cost can negate some of the savings from the lower interest rate.
• 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.
• Impact on Credit Score: Initially, a balance transfer might have a negative effect on your credit score. This is one of the disadvantages of a balance transfer. Applying for a new credit card leads to a hard inquiry on your credit report, which can temporarily lower your score.

A balance transfer card often comes with an introductory offer of a 0% interest rate for a set period, typically 6 to 21 months. This means every payment you make during this period goes directly to reducing your principal debt, rather than being partly used up by interest charges.

A balance transfer, while potentially beneficial, can be a double-edged sword if not handled carefully.

If you continue to accumulate charges on your old card after the transfer or add expenses on the new one, you may sink deeper into debt. 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.

You should approach balance transfers with a solid repayment plan and disciplined spending habits to prevent escalating your debt. To truly benefit, you'll want to pay off as much of your balance as you can during the low-interest period.

When considering if a balance transfer is a good idea, it's essential to factor in the often-overlooked balance transfer fees. Are balance transfers bad due to these fees? Not necessarily, but it's important to be aware of them.

Usually, they range from 3% to 5% of the transferred amount or a minimum amount set by the issuer, whichever is higher. So, if you're transferring a large balance, this could mean paying a significant amount upfront. You should calculate these fees against the potential interest savings to ensure your balance transfer strategy makes financial sense.

A balance transfer could be a strategic financial move if used wisely. However, it's crucial to assess whether it aligns with your specific financial situation and goals.

Here are some considerations to help you decide:

• Are you carrying high-interest credit card debt? Balance transfers are particularly useful when you're struggling with high-interest debt. By transferring your balance to a card with a lower interest rate, you can potentially save a significant amount of money on interest.
• Can you pay off the balance within the introductory period? Many balance transfer cards offer a 0% introductory APR. However, this rate usually only lasts for a certain period (typically six to 21 months), after which the rate increases to the higher, standard APR. Consider whether you can realistically pay off the balance within that timeframe.
• Are the balance transfer fees worth it? Balance transfers often come with fees. Calculate whether the cost of the transfer fee is less than the amount you'd save on interest to avoid unnecessary fees.
• 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.

After considering these points, you can make an informed decision about whether a balance transfer is right for you.

MORE: Best Balance Transfer Credit Cards in 2023

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.

Now that you understand the pros and cons of balance transfers, determine if this might work well for you. If you feel it might, then base your search for a suitable balance transfer card on factors such as duration of the 0% APR offer, annual fees, regular APRs and additional benefits.

MoneyGeek experts use data provided by the Bureau of Labor Statistics (BLS) to analyze the spending trends of people across the country. They also monitor changes in fees, APRs and offers of over 1,600 consumer credit cards so that our readers may find alternatives to suit their needs with ease.

Our editorial team remains up to date on the latest financial trends and changes in the credit card industry. If you have any questions about credit cards, be it about how to select the best balance transfer card and what to look for in a rewards card, you may rely on it to provide quick and useful answers.