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Balance transfers can be a lifesaver if you hope to pay down debt without having to deal with the high interest rates credit cards normally charge. However, credit card balance transfers are far from foolproof, and they can cause just as many problems as they solve.
Before you sign up for a balance transfer credit card and take steps to consolidate debt, it helps to know how balance transfers really work, as well as their main advantages and disadvantages.
Are balance transfers bad? They don’t have to be and they can easily save you hundreds (or thousands) of dollars, but you’ll have the best shot at saving if you go about your balance transfer the right way from the start.
What is a balance transfer?
Balance transfer is a term used to describe the act of transferring balances from one credit card to another. Consumers typically transfer balances in order to take advantage of credit card offers that extend a 0 percent APR for a limited period of time.
The Citi Simplicity® Card is one of the most popular balance transfer cards available right now, and it’s easy to see why. This card gives new cardholders 18 months with an introductory 0 percent APR on purchases and balance transfers, after which they’ll pay a variable APR of 14.74 percent to 24.74 percent. Balance transfers must be completed within the first four months of account opening. A 3 percent balance transfer fee (minimum $5) applies, but it has no annual fee, no late fees and no penalty APR. Without any interest for a year or more, cardholders who initiate balance transfers have the chance to pay down debt faster—and without having to waste money on interest payments.
At this point, you may be wondering what could possibly go wrong with a 0 percent introductory APR. Is it good to transfer credit card balances?
At the end of the day, consumers who opt to consolidate debt with a 0 percent intro APR credit card may help themselves or make their situation worse. It all depends on whether they take debt repayment seriously, as well as whether they continue using credit cards to rack up more debt.
Is a balance transfer a good idea?
You may or may not be an ideal candidate for a balance transfer, but you should know about all the potential advantages and pitfalls before you move forward.
Pros of a balance transfer
- Save money on interest: By consolidating high-interest credit card debt with a balance transfer card, you can save thousands of dollars in interest depending on your debt. It’s easy to see why you can save so much when you consider that the average credit card interest rate is currently over 16 percent.
- Pay off debt faster: During your card’s introductory offer period, every dollar you pay goes toward your debt. This means you can stop wasting money on interest and pay off your debt at a much faster pace.
- Simplify your financial life: If you have debt on multiple credit cards with high interest rates, a balance transfer credit card can make debt repayment easier. Instead of making multiple debt payments each month, you can move all your debt to your balance transfer card and make one payment every month.
Cons of a balance transfer
- Potential for more debt: Consolidating debt with one new credit card can make it tempting to rack up more debt on other cards. Not only that, but you will only make considerable progress with your debt repayment if you have the discipline to pay as much as you can each month.
- Balance transfer fees: Balance transfer credit cards typically charge upfront fees that equal 3 percent or 5 percent of the debt you’re transferring. These balance transfer fees can add up quickly if you transfer balances over and over, and they eat away at your interest savings.
- Excellent credit required: The best balance transfer offers aren’t available for consumers with less than stellar credit, so you may not qualify. If you want to transfer balances with bad credit, you may have to choose from inferior offers.
- Balance transfer offers don’t last forever: Also remember that cards in this niche only offer a 0 percent introductory APR for 12 to 18 months in most cases. If you don’t get serious about your debt during that time, you may not end up much better off.
How to tell if a balance transfer is right for you
Is it good to transfer credit card balances? That’s a question only you can answer. Generally speaking, balance transfers work best if you can meet the following criteria:
- You have very good or excellent credit
- You have a plan to pay off your debt or make considerable progress during your card’s introductory offer period
- You plan to use cash or debit for purchases (instead of other credit cards) while you’re paying off debt
In addition to checking off the boxes above, you should also run the numbers to see how much you could save with a balance transfer offer. For example, imagine you owe $6,100 in credit card debt on two different credit cards that charge a 21 percent APR, and that you’re currently paying $350 per month across both accounts. At this rate, it would take you 21 months to become debt-free if you didn’t make any other charges, and you would pay $1,240 in interest payments during that time.
Now picture yourself signing up for the Citi® Diamond Preferred® Card, which offers an introductory 0 percent APR on purchases and balance transfers for 18 months, followed by a variable APR of 13.74 percent to 23.74 percent. Balance transfers must be completed within four months of account opening. If you transferred your $6,100 in debt over, you would owe a balance transfer fee of $183, which is 3 percent of your balance.
This means you would start your debt payoff with a balance of $6,283. However, you could pay off your debt completely in 18 months with the same monthly payment of $350. This means your total cost for debt repayment drops from $1,240 in interest to the $183 you paid in balance transfer fees.
If you’re curious how the numbers might work for your situation, Bankrate’s credit card balance transfer calculator can help.
Choosing a balance transfer card: What to look for
As you compare the best balance transfer credit cards, there are a few major factors you should look for and compare. First, check for cards that feature introductory APR offers for as long as possible—especially if you have a lot of debt to pay down. Second, check to make sure any card you’re considering doesn’t have an annual fee and look for cards with balance transfer fees at the lower end of the scale (or 3 percent instead of 5 percent).
Also, be sure to check for any cardholder benefits you may want access to, such as purchase protection, travel insurance or no foreign transaction fees.
Finally, some balance transfer credit cards also offer rewards. For example, the new Wells Fargo Active Cash℠ Card offers a flat 2% cash rewards rate on purchases, in addition to a 0 percent introductory APR on purchases and qualifying balance transfers for the first 15 months (14.99 percent to 24.99 percent variable APR after that). But a rewards card can be a poor choice if your ultimate goal is paying off debt since you have to spend to earn points or cash back.
The bottom line
Is it good or bad to transfer credit card balances? Either scenario could turn out to be true, and it all depends on how you handle the situation.
If your goal is consolidating debt to pay it off, then a balance transfer can be a valuable tool. But if you only want to consolidate balances so you can rack up more debt on other cards, then you probably won’t get much benefit in the end.
Here’s our advice: approach balance transfers with a certain amount of caution, and only move forward if you have a plan to get out of debt. Transfer balances the right way, and you could pay down your balances faster, save thousands of dollars or both.