Balance transfer credit cards can be a great tool to help manage out of control credit card debt. Good balance transfer cards come with 0% introductory rates that last anywhere from six months (not so great) to 24 months. Before opening a balance transfer credit card however, you should analyze the benefits and disadvantages of doing a balance transfer to make sure it is a good move for you.
Benefits of Balance Transfer Credit Cards
- 0% APR introductory periods. Low start up rates can save you a bundle of money over the interest you are likely paying currently. Going from a 15% interest rate to a 0% rate will sharply reduce your yearly interest expenses.
- A tool to pay off debt. A balance transfer credit card, when used wisely, is a great way to get your credit card debt under control. All of your debt is in one place and with consistent monthly payments you will be on your way to a zero balance. Since your interest rate is 0%, all of your payments will go towards reducing debt, rather than being split between your debt and new interest charges.
- A means to increase your credit score. Although your credit score may take a hit when you first open the account and transfer your balances, as your debt diminishes your score will improve. This is because your credit utilization ratio – a key component of your credit score – will drop because you will eventually have less debt and more available credit.
- Balance transfer offers, like all credit card offers, are unsecured debt. Therefore, your debt is not tied to anything in terms of collateral, unlike for example taking out a line of credit on your home to pay off debt.
- Inexpensive means of borrowing money. Over other options you might have to pay off your credit card balances, opening a balance transfer card can be a cheap option. Personal loans, lines of credit, and even second mortgages aren’t going to provide you with 0% interest rates.
Disadvantages of Balance Transfer Credit Cards
- You will most likely pay a transfer fee. Almost all balance transfer offers will charge you a transfer fee up front. Average balance transfer fees are about 3%, but some cards charge as much as 5%. In many cases this will be worth it, but make sure you consider the fee in your decision.
- Introductory Periods End. If you do not pay off your balance during the introductory period, your interest rate will return to a level similar to what you were paying before you opted to do a 0% balance transfer. This will leave you with two options if you don’t pay off your debt before your introductory period expires: do a second balance transfer or pay off your credit card debt at a standard interest rate.
- Good credit is needed. Balance transfer cards are generally only available for those with good credit ratings, so if you have a low score you may not be eligible. This hurts many people who could benefit the most, so if your credit is only average, take steps to improve it before you apply for a new card.
- When not used wisely can give you the means to rack up more debt. When you open a balance transfer card it leaves open credit on existing cards. Take precautions against racking up new credit card debt and if necessary cut up and cancel your old cards.
Overall, the benefits of doing a 0% APR balance transfer greatly outweigh the disadvantages. However, to get the most out of a balance transfer, be sure to use your introductory period wisely. Don’t run up more charges on your old cards or pay only the minimum simply because your interest rate is low. Focus on getting out of debt as soon as possible, so you don’t end up chasing 0% deals every time your rate increases.