Pros and Cons of Balance Transfers

Transferring a balance from a higher-interest credit card to a lower-interest one can be a great way to save money and get out of debt faster. It can also be a great way to get into even more debt and make a bad financial situation worse. Even more confusing: a promotional balance-transfer offer can heighten either situation.

First find out if everyone approved for the card receives the 0% rate, or if the rate depends on your credit. You may want to skip the latter type of offer since you don’t know what rate you’ll qualify for until after you apply. Why give yourself the temptation of more available credit if you can’t even use the new card to lower your interest rate?

Let’s say you do get the new card with a lower interest rate—or just want to shift a balance to a lower-rate card you already have. Test out these pros and cons before doing a balance transfer.

Paying less interest on your credit card debt will, of course, save money. But depending on the deal and the fees, it may not save enough to be worth the trouble. Before you jump, do the math.

Say you have a $3,000 balance with a 30% annual percentage rate (APR). That means you’re currently paying $900 a year in interest. Sometimes you can find a promotion with no balance transfer fee and a 0% introductory period APR, but let’s assume you have to pay a 3% balance transfer fee, which is common. In this case, it will cost you $90 to transfer your $3,000 balance. Transferring your balance to a card with a 27% APR means you’d be paying $810 in interest a year; add on the $90 balance transfer fee, and you’d just about break even after a year.

Conclusion: In this example, you’d need to look for a deal where the APR is less than 27% to come out ahead. Don’t forget to factor your time frame into the equation: Transferring a balance isn’t worth the hassle unless you save a meaningful amount of money. A free, online balance transfer calculator will help you do the math with the dollar amounts and interest rates specific to your situation.

You can also use a lower interest rate to pay off your debt more quickly. Suppose you can afford to put $300 a month toward paying down your $3,000 balance. Here’s how that process would look at two different interest rates:

Scenario No. 1

• Total debt: $3,000
• Interest rate: 30%
• Debt payment: $300/mo.
• Months to get debt-free: 12 
• Total interest paid: $497

Scenario No. 2

• Total debt: $3,000
• Interest rate: 15%
• Debt payment: $300/mo.
• Months to get debt-free: 11
• Total interest paid: $226

Conclusion: Scenario No. 2 gets you out of debt one month sooner compared with Scenario No. 1 (and it saves you $271 in the process). A free, online credit card debt payment calculator can help you see how long it will take to get out of credit card debt with the monthly payments and interest rates that apply to your situation.

After transferring your balance from the higher-interest card to the lower-interest one, think about what to do with your higher-interest card. One school of thought opines that you should close that card to avoid the temptation of having that extra credit line available. If it’s not there, you’ll have to find more creative ways to meet your expenses and think more carefully about which purchases are really necessary.

However, that move can be bad for your credit score. Applying for a new credit card can already ding your credit score for a short period of time. And closing an old one can surprisingly also affect your credit score. For starters, having one fewer card will lower your total available credit (otherwise known as your credit utilization ratio), which can have a negative impact on your credit score, especially if you’re using a high percentage of your available credit. If it’s one of your oldest cards, you’ll also shorten your credit history.

Conclusion: If your goal is to get out of debt, your first priority should be to make decisions that help you achieve that goal. If you can muster the willpower, keep that older credit card, but don’t charge anything to it–even if you need to lock it in a drawer or temporarily give it to someone else for safekeeping. If you don’t think you can keep from using that credit, close the account.

Exception: If you’re applying for a mortgage in the near future, don’t risk lowering your score by either opening a new card or closing a higher-interest card. Instead of playing the credit-card balance-transfer game, focus on paying down higher-interest debts before focusing on lower-interest balances.

Carefully consider how much new temptation you can withstand before adding to your credit limit. The card to be most careful of is the new one.

To take advantage of a low promotional APR balance transfer offer, avoid making new purchases using the card to which you’ve transferred your balance unless the new card also offers 0% on purchases as well as balance transfers. Since it already has that balance-transfer debt on it, it probably offers no grace period on new purchases and you don’t want to start accruing more interest.

Conclusion: Be sure to make all your minimum monthly payments on time on both the card you’re transferring the balance from and the card you’re transferring it to. You don’t want to get hit with any late fees. What’s worse, if you pay late on your new card, you’ll usually forfeit the promotional APR and be stuck paying a penalty APR that could be as high as 29.99%. To be on the safe side, look for a card with no penalty APR, such as the Citi Simplicity or Discover it card.

Finally, keep track of the date when the 0% rate expires. Don’t expect a reminder from the credit card company—it’s banking on you missing the deadline so you’ll have to pay interest on your balance.

Transferring a credit card balance should be a tool to help you get out of debt faster, not a way to minimize the reality of your debt by making your payments smaller for a few months. If you transfer a credit card balance for the right reason, understand the fine print, do the math before applying to make sure you’ll come out ahead, and create a repayment plan you can stick with, a balance transfer can help you get out of debt sooner and spend less money on interest.