Balance Transfers: Are They Worth It? Everything You Need to Know
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Updated 2024-12-17T18:39:13Z
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Introduction to balance transfers
What is a balance transfer?
Balance transfers can be an excellent debt-elimination tool when used correctly. By consolidating credit card debt from one card to another, you can take advantage of a promotional 0% APR or lower interest rate and get out of debt faster. However, there are some drawbacks associated with balance transfers, including transfer fees and the potential for increased debt if your balance isn’t paid in full by the end of the promotional period.
How balance transfers work
To complete a balance transfer, you move an outstanding balance from one credit card to another card, typically one with a lower interest rate or a promotional 0% APR offer.
It’s essential to understand the terms, such as transfer fees and the duration of the low-interest period, to ensure a balance transfer actually makes sense for your financial situation. Knowing when and how to manage debt with balance transfers can help you pay down debt faster and save on interest charges in the long run.
Common reasons for using a balance transfer
Balance transfers give you a temporary grace period where interest does not accumulate on your credit card. These transfers are great for people who have a big expense coming up or want to consolidate their debt. For example, balance transfers can be a great way to finance an engagement ring.
Receiving an intro 0% APR can save you plenty of interest in the long run, especially if you can only make the minimum monthly payment. You can get out of debt faster with a balance transfer.
Benefits of balance transfers
There are many advantages to balance transfer cards. They include consolidating debt, saving on interest, and improving your credit score. Consolidating debt can make it easier to keep track of payments and reduce the interest you pay overall. Additionally, balance transfers can help improve your credit score by lowering your debt-to-credit ratio. Finally, balance transfers can reduce high interest rates on existing debts and help you save money in the long run.
Lower interest rates
Balance transfers are great if you need time to pay off debt without incurring interest fees. With the average credit card interest rate topping 20%, a balance transfer can save you a lot of money on interest.
Years ago, I took on some unexpected debt but was able to save hundreds of dollars over a year by taking advantage of a Citi credit card balance transfer offer. Instead of paying an APR of over 25%, I paid a 3% transfer fee and avoided interest for the next 12 months. In my case, it worked out favorably, but that’s because I made more than the minimum payment every month, paying off the full balance before the 12-month promotional period ended.
Debt consolidation
0% balance transfer credit cards are a great way to consolidate debt because they allow you to move all of your debt onto one card with a 0% interest rate. This means you can pay off your debt without incurring any additional interest charges, saving you a lot of money. Additionally, many 0% APR credit cards offer an intro period of up to 21 months, giving you plenty of time to pay off your debt without worrying about accruing more interest.
Potential savings on interest payments
Interest accrues quickly on credit card balances due to the high APR. In some cases, the amount of interest that goes on your balance can be close to your minimum monthly payment.
Without a temporary reprieve, it can feel difficult to get out of credit card debt. However, 0% APR balance transfers allow interest to stop growing. You can then put more money into paying off your credit card debt so your interest payments are much lower after the promo period concludes.
Drawbacks and risks of balance transfers
While 0% intro APR balance transfer offers can be tempting, they often come with fees and costs that make them a bad deal. They can also trap you in debt. You might feel tempted to stick to the minimum monthly payment, only to end up barely making a dent in your balance when the promotion period is up.
Lastly, most 0% APR balance transfer offers are limited to those with good credit or better, so not everyone will qualify for them.
Balance transfer fees
Most credit card companies charge a balance transfer fee of 3% to 5% of the amount transferred. This means that you’ll pay $30 to $50 for every $1,000 transferred.
Depending on how long your 0% APR offer is for and how high your balance is, this could be a good or bad deal. For example, if your credit card carries a 23% APR, you’ll pay $230 interest on an average $1,000 daily balance over a year. A 0% balance transfer APR with a 3-5% fee makes sense.
However, if you can pay your $1,000 balance off within a month or two, you’ll incur $19 to $38 in credit card interest. In this scenario, paying the interest might be more favorable than incurring $35 to $50 in balance transfer fees.
Promotional APR limitations
Most balance transfer offers are only good for a limited time. If you don’t pay off your total balance before the end of the promotional period, you may incur interest on the remaining balance at a high APR. It’s easy to fall into this trap by only making the minimum monthly payment and thinking you have plenty of time to pay the rest at the end of the promotional period.
You can avoid this obstacle by sticking to a plan to pay off your total balance. Divide your balance by the number of intro APR months to determine the payment you’ll need to make every month. Setting up autopay can keep you on track to pay your card off on time and avoid incurring interest.
Risk of accumulating more debt
Balance transfers can offer a false sense of security since interest payments temporarily go away. While this setup presents an opportunity to pay off debt, some people may continue to rack up credit card debt without making more than the minimum monthly payment.
Falling into this bad habit can set cardholders for an unpleasant surprise once interest payments resume. Balance transfers can put consumers deeper into debt if they do not change their spending habits or opt to buy more stuff because interest isn’t accumulating.
Are balance transfers worth it?
Balance transfers can be a great way to save money on interest payments and consolidate debt, but they’re not always worth it. Depending on the balance transfer terms, you may be charged a fee of up to 5%. Additionally, if you don’t pay off the balance transfer within the promotional period, you may end up paying a high interest rate.
It’s easy to fall into the trap of making just the minimum payment and getting no closer to paying off your balance when the promotional period ends. It’s important to consider all of these factors before deciding whether or not a balance transfer is worth it for you.
When to consider a balance transfer
Anyone looking to make a large purchase or consolidate debt should consider 0% APR offers. These offers can provide a great way to save money on interest and pay off the balance faster.
However, it’s important to understand the terms of the offer before signing up, as some offers may have restrictions that could limit your ability to take advantage of the offer. Additionally, make sure you can pay off the balance before the promotional period ends, as any remaining balance will be subject to regular interest rates.
Situations where balance transfers might not be ideal
0% intro APR offers should only be considered by those who are able to pay off the balance within the promotional period. If the balance is not paid off before the promotional period ends, any remaining balance will begin to accrue interest at a high rate.
Additionally, those with poor credit scores should avoid 0% APR offers, as they may be denied due to their credit history.
Balance transfers also don’t make as much sense for people who have low credit card balances. If you have less than $1,000 on your balance, you can potentially save money by paying it off sooner instead of incurring the balance transfer fee.
Is a Balance Transfer a Good Idea?
This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.
A balance transfer could help you save on interest. However, if you don’t have good credit, or know you’ll struggle with payments, it may not be a good option.
At-A-Glance
- A balance transfer can allow you to move high-interest debt to a card with a lower interest rate (or 0% introductory offer), which could result in significant savings over time.
- A balance transfer may make sense if you get approved for the right credit card and have a plan to repay the debt you transfer before the promotional period ends.
- You might want to explore other debt-relief options if you can’t secure a card with a lower rate than what you’re paying on your current card or know it will tempt you to get into more debt.
With a balance transfer, you transfer high-interest debt from one credit card to another, ideally one with a lower interest rate, or a 0% Annual Percentage Rate (APR) introductory offer. This strategy can be an appealing option if you’re looking to consolidate debt or save on interest payments. However, before you move forward with a balance transfer, you’ll want to keep in mind that balance transfers may not be the right choice for everyone. In this article, we’ll take a look at the benefits of balance transfers, along with potential risks, helping you to determine whether a balance transfer is the right move for you.
When Is a Balance Transfer a Good Idea?
Whether or not a balance transfer is a good idea will depend on your needs and financial situation. It also depends on whether you’re able to secure the right credit card. Here’s a look at some situations where a balance transfer could make sense:
- If You Can Qualify for the Right Credit Card
One of the most noteworthy benefits of a balance transfer is that you can move your debt to another card with a lower interest rate. Some balance transfer cards come with a 0% APR introductory offer, which may be anywhere from six months to 18 months. 1 If you can get approved for a credit card that has a 0% intro offer, a balance transfer may be a good option. 2 - If You Can Pay Off the Balance
A balance transfer can be a good option if you’re able to pay the balance off, or at least greatly reduce it, by the end of the introductory period. If not, you may end up having to pay the card’s regular interest rate, which could end up being higher than what you’re currently paying. For this reason, you’ll want to check the regular APR of the card in question so you know what you’ll be charged if you’re unable to pay the balance off in time. - If You Won’t Be Adding Debt
To reap the benefits of a balance transfer, you must be disciplined in your spending habits. You should only pursue this strategy if you know you won’t end up adding to the debt as you pay off your balance. 3
When to Avoid Balance Transfers
While balance transfers can be a useful tool for paying off debt, they aren’t for everyone. If you know you’ll struggle to make payments, or can’t qualify for the right balance transfer card, then it may be best to hold off on doing a balance transfer.
- If You Don’t Have Strong Credit
If you have bad credit, you may not be a good candidate for a balance transfer. You may need to have good credit in order to get approved for a balance transfer card. 4 - If You’ll Struggle to Make Payments
Once you transfer your balance to a new card, you’ll need to stick to a payment plan and make at least the minimum payment on time each month. If you don’t make payments on time, you could end up with penalties and a higher interest rate. - You’ll Spend More on the New Card
The point of the balance transfer card is to help you pay off your balance during the introductory period, helping you to save on interest. If you know that you’ll end up using the new credit card for additional purchases and carrying a balance from month to month, then you’ll want to hold off getting a balance transfer card.
Choosing the Right Balance Transfer Card
If you decide that you want to use a balance transfer card to pay back your debt, keep these factors in mind as you shop for the right one.
- Length of Promotional Period
Ideally, you’d choose a credit card with a low or 0% introductory APR. A card that extends this offer to a period of 12 to 18 months is your best bet. 5 This will give you plenty of time to repay your balance at a 0% or low APR and save as much as possible on interest. - Regular APR After the Promotional Period
Be sure to review the ongoing APR that will apply once the introductory period ends. Keep in mind that a strong credit score may help you to qualify for a lower APR, which will kick in after the promotional period. 6 This is important if you anticipate carrying a balance past the promotional period. - Balance Transfer Fees
You’ll also want to take into account balance transfer fees, which could range from 3% to 5% of the amount you’re transferring. 7 You’ll want to factor these costs in to make sure it still makes financial sense. 8 - Credit Card Annual Fee and Features
While typically, you won’t be able to earn rewards for balance transfers, you may want to consider other benefits and features that the credit card offers. For example, some credit cards may allow you to split up purchases into manageable payments. Others may allow you to earn rewards on purchases. This is something to keep in mind if you’re planning to use the card again once you’ve paid the balance off. - How Much You’d Like to Transfer
Check the credit limit of the new card to see if it can accommodate the amount of debt you plan to move. Additionally, read the terms and conditions because some cards restrict the transferable amount, even if your credit limit is higher. 9
https://www.businessinsider.com/personal-finance/credit-cards/are-balance-transfers-worth-ithttps://www.americanexpress.com/en-us/credit-cards/credit-intel/is-a-balance-transfer-a-good-idea/
