6 times a balance transfer is a bad idea

A balance transfer credit card can come in handy when you want to pay less interest on the debt you owe on an existing credit card. This maneuver can save you money and buy you a little extra time to repay your debts, but not everyone is a good candidate for a balance transfer.

If you’re thinking about pursuing this path, it’s a good idea to explore how a credit card balance transfer works, when to avoid balance transfers, alternative strategies and what to ponder prior to committing to a balance transfer. Read on for details and expert advice.

Understanding balance transfer credit cards

A balance transfer credit card is one that typically provides a 0 percent introductory APR on balance transfers, allowing you to move your existing credit card debt from a high-interest card to the balance transfer card. Your new balance transfer card will ideally charge zero interest for around 12 to 21 months and have a high enough credit limit to take on all of your other card’s debt. To use a balance transfer card effectively, your goal should be to completely eliminate your credit card debt within this time frame.

When the traditional method of paying off debt seems overwhelming, a balance transfer credit card can be an effective solution. Upon transferring your debt to this type of card, you immediately start benefiting from interest savings. Moreover, every payment you make toward the credit card bill directly contributes to reducing the principal balance owed. This attribute makes a balance transfer credit card a valuable tool for individuals seeking to become debt-free.

To initiate the process, you’ll need to apply for a balance transfer credit card and specify the amount you wish to transfer from your existing high-interest credit card. If approved, the new balance transfer card provider will handle the transfer, paying off the debt on your behalf. You will then owe the amount to the new card issuer but with the advantage of the 0 percent intro APR period which should help you tackle the debt more efficiently.

“A credit card balance transfer is akin to taking a detour on a road trip. Instead of continuing down a high-interest highway, you reroute to a lower-interest scenic route. It provides a chance to save on interest, consolidate debt and potentially pay off your balance more quickly.”

— James AllenCertified public accountant and certified financial planner

Balance transfer bad ideas: Avoid these 6 scenarios

But be forewarned: Just because you can apply and get approved for a balance transfer credit card doesn’t mean this is a good strategy for you. There are several times a balance transfer is a bad idea, and the experts agree. Here are six such scenarios:

1. You can’t make your debt payments on time

If punctuality isn’t your forte, a balance transfer might make things worse.

“On top of a balance transfer credit card’s standard late fee, making just one late payment or missing a payment altogether could forfeit your introductory 0 percent rate — negating the purpose of the transfer. You might also be subject to a penalty APR, which is higher than the card’s standard APR and can go as high as 29.99 percent.”

— Marin KraushaarPR director, Georgia’s Own Credit Union

Instead of risking additional financial anxiety, try the following actions first:

• Devise an on-time payment plan with your current credit card.
• Automate your payments through your bank or financial institution or directly from your paycheck.
• Make more frequent but smaller payments that may be more manageable.

“For example, instead of paying $100 every month, break it up into four payments of $25 each week,” she suggests.

Taking these steps could help you stay on top of your payments and avoid the late fees and penalties that might come with a new balance transfer credit card.

2. Your debt can be repaid relatively soon

If you have the means to pay off your credit card debt fairly quickly — say within three months — a balance transfer might not be worth it.

“Most transfers take at least one billing cycle to go through, and you will likely be paying between 3 percent and 5 percent of your balance for the transaction,” cautions Kraushaar. “Plus, completing a balance transfer will require a hard pull on your credit, which will cause your credit score to drop temporarily.”

Take the time to calculate how much you’d save on interest for the remaining payments with a balance transfer versus what you would pay for the transfer fee; then, determine if the transaction is still a good idea.

If not, a better tactic could be sticking with your existing card and making larger payments on your debt or extra payments every month.

3. You’re tempted to overspend

If you’re inclined to spend more and overdo it on your credit card, a balance transfer may only enable that behavior.

“For balance transfers to be effective, you must stop adding new debt to all accounts. When you transfer balances from one card to another but continue to charge on that card — or other cards — you are just digging yourself into a deeper debt hole.”

— Amy MaligaFinancial educator, Take Charge America a national nonprofit credit counseling and debt management agency

A better solution? Get your spending under control, and set and follow a realistic budget that responsibly tracks funds coming in and going out. Work on avoiding impulse spending, and try to pay more than the minimum due on your credit cards every month.

4. You have less-than-desirable credit

Keep in mind that you’re likely going to need good-to-excellent credit to be eligible for a balance transfer credit card with a 0 percent introductory interest rate. If your credit isn’t ideal, you may still qualify for the balance transfer but not the 0 percent intro APR offer that’s advertised. While there are some options for balance transfer cards with bad credit, the best offers will likely be out of reach.

Further, every time you apply for a new credit account, there will be a hard pull of your credit, which will drop your credit score by a few points — whether you’re approved for the balance transfer card or not.

“Be sure you are 100 percent clear on what your interest rate and terms will be. In some cases, it may make more sense to stick with your original credit card until you can bring your credit score up by making on-time payments and reducing your debt,” advises Kraushaar.

Alternatively, contact your creditors to see if they offer a temporary hardship plan. This type of plan may waive any fees and decrease your interest rates for at least a few months, allowing more of your payment to go toward the principal and helping to reduce your overall debt.

5. You plan to apply for other major financing soon

Preparing to apply for a mortgage, auto, home equity or personal loan sometime soon? Pursuing a balance transfer credit card could hurt your chances of getting approved for financing. That’s because applying for the balance transfer card could temporarily lower your credit score, affecting your ability to get approved for a loan or qualify for a low interest rate on that financing.

“A better strategy is to simply delay applying for a balance transfer card until after securing the loan you want,” Allen recommends.

6. Your debt is out of control

If you feel overwhelmed with debt that has become unmanageable, pursuing a balance transfer card may only put a temporary band-aid on a festering problem.

“While it may provide some short-term relief and savings, the low promotional rate on your new credit card will eventually expire. If you haven’t paid off the balance transfer by the time it does, you will be back to paying higher interest rates,” says Maliga.

Depending on your debt load, you may also only be permitted to move a portion of your credit card balance to the new card.

If you feel like you’re sinking in a deep debt pool, explore nonprofit credit counseling, which can better address your long-term debt. A certified counselor can review your earnings, expenses and debts and offer worthy solutions for getting out of debt.

“In many cases, a debt management plan may be the recommended solution. Credit counseling agencies manage these plans for their clients,” Maliga continues. “Debt management plans offer many of the same benefits as debt consolidation — including lower interest rates and the convenience of a single monthly payment. The good news is there is no minimum credit score required to qualify. Thanks to lower interest rates, clients can pay off their debt in full much more quickly than they could on their own.”

What else to consider before a balance transfer

Know what you’re getting into before committing to a balance transfer credit card and transferring a balance. Crunch the numbers to evaluate if this strategy will truly save you dollars over the long term, and don’t forget to factor in any fees involved.

“Understand the terms of the balance transfer before signing over the debt,” says Kraushaar. “Make sure you comprehend what the introductory interest rate is, how long the promotional period lasts, what the interest rate will default to once that period is over and how that compares to your current interest rate. Perhaps most importantly, have a game plan for repayment before you even have the new card in your hands.”

The bottom line

Even if you qualify for a new balance transfer credit card, it might not be the right financial tool for you. If you’re not careful, you could find yourself making mistakes with your balance transfers that only push you further into debt. Plus, you’ll still need to use your new card responsibly after your transfer goals are met, so a balance transfer might not be worth it if you don’t want or can’t manage another credit card.

“Balance transfers only work as a money-saving strategy if you are willing to change any bad spending habits,” adds Maliga.

In addition to researching balance transfer credit cards, consider alternatives like debt consolidation loans and credit counseling. A good credit counselor from a licensed nonprofit organization can help you create a repayment plan and reevaluate your spending.