Balance transfers are a lesser-known and potentially underutilized aspect of some credit cards. They allow you to move debt from a high-interest card to another with a much lower annual percentage rate — even as low as 0% APR.
But what are the pros and cons of balance transfers, and should you rely on them to save money? Here's what you need to know.
What is a balance transfer credit card?
In short, a balance transfer credit card allows you to move your credit card debt from one account to another to pay a lower APR on the receiving card.
Several credit cards offer an introductory 0% interest rate on balance transfers, so if you've accrued a lot of debt on another card, you can transfer the amount to one of these cards and pay it off over time stress-free. The introductory rate on these cards typically lasts 12 to 21 months, giving you plenty of time to reduce your overall debt load.
Pros of balance transfer credit cards
Here are the main benefits of executing a balance transfer:
Interest savings
Balance transfer cards allow you to save significant amounts of money on interest. If you've stacked up a lot of high-interest debt on another card, a balance transfer can act almost as a "get out of jail free" card if executed properly.
Of course, you'll want to pay off the debt on your new card before the interest rate kicks in. Otherwise you might find yourself back at square one.
Paying off debt more quickly
By reducing or eliminating the interest that accrues on your credit card balance, you can pay off your debt more quickly. This is because, during the 0% APR period, your entire credit card payment is applied to the principal balance, instead of being eaten up by interest charges.
Consolidating debt
Credit card debt can create additional stress if it's spread out across multiple creditors — for example, many people owe money on several different credit cards. Using a balance transfer credit card to consolidate your debt onto a single card at a lower rate can help lower your stress levels.
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You can then focus on paying off that single debt at your own pace, moving one step closer to being debt-free.
Cons of balance transfer credit cards
Balance transfers can be a smart move, but there are some downsides to be aware of.
Transfer fee
Most balance transfer cards charge a balance transfer fee of 3% to 5% of the amount transferred. As such, you'll want to make the necessary calculations and decide if transferring your balance is worth it or if it's better to keep your debt where it is and pay it off from there.
Also, a minimum balance transfer amount may be required, so read the fine print of any balance transfer card you're considering.
Lower interest rates are temporary
The low APRs offered by balance transfer cards are always temporary. If you don't pay off your debt by the end of the promotional period, your APR will revert to the higher standard rate — putting you right back where you started.
Risk of falling further into debt
If you continue accruing debt on your high-interest card after processing the balance transfer, you could end up with more debt than before. Balance transfers should be limited to emergency situations and should not become routine. Adopt smart spending habits to avoid a vicious cycle of constantly accruing and transferring high-interest debt.
Higher credit score requirements
Lastly, most balance transfer cards require a good credit score. If you have a lower credit score, a balance transfer card may be a non-starter and you may want to consider an alternative, such as a debt consolidation loan, instead.
Is a balance transfer worth it?
Credit card balance transfers can be the right financial choice in many situations, even after factoring in transfer fees and temporary promotional periods. However, try not to make a habit of relying on balance transfers. Ultimately, your goal should be to pay off your debt fully, not just move it around.
Check out TPG's 10 commandments of credit card rewards to ensure your credit cards earn money for you, not the other way around.
Bottom line
Balance transfer credit cards help you save money by allowing you to move debt from a high-interest credit card to one that charges as little as 0% APR for 12 months or longer. They can also help you consolidate your debt into a single payment if you owe money on multiple cards.
But keep in mind that you will need a good credit score to qualify for a balance transfer credit card. Other options include a debt consolidation loan.
Editorial disclaimer: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.
