Are balance transfers worthwhile? They can arise in a few situations, but it depends on how you deal with them. So if you are thinking of transferring an account balance, there are a few things you need to know first.
(If you are new to this, you can read more about what credit transfers are here.)
Do not perform a balance transfer unless you fully understand them, including their pros and cons. Because they may or may not be worth it, and there’s a little catch.
So how can you tell if balance transfers are worthwhile when you pay off debt? Start by reviewing some pros and cons.
Benefits of credit transfer offers
We have already mentioned the biggest advantage: lower interest rates. If you can transfer high-interest debt to a card with a low or 0% interest rate, it costs less to pay off the debt.
You should also be able to repay it faster if you focus on paying it off on time.
Transferring funds between two credit cards means less responsibility than juggling multiple bills each month. And waiving a debt consolidation loan can also be an advantage.
Of course, if you’re looking for ways to pay less interest on your credit cards, they sound attractive. You may also be tempted to use balance transfers to help settle debts faster. But there are also downsides that can mean that a credit transfer isn’t worth it for you.
Let’s go over the cons next, and this is where the catch comes in.
Disadvantages of credit transfers
There are several disadvantages to making balance transfers:
You need excellent credit. You may not qualify for a balance transfer if you don’t have excellent (or sometimes good) credit. There could also be some other things that cause creditors to decline your transfer request, such as financial over-indebtedness or high balances on multiple cards.
There are charges for transferring funds from one card to another. On average, the fees are 3 to 5% of the transfer amount. So if you’re transferring $ 3000, for example, it could cost anywhere from $ 90 to $ 150. But it can also be higher or lower. Check the terms of the card you plan to use.
You will be hooked for the fees no matter what when you start a fund transfer. So you have to weigh up whether balance transfers are still worthwhile after taking into account the fees.
Late payments can cost you. As with other cards, you will be charged a late payment fee. However, if you have a low APR, late payment can cost you a lot more. That’s because you might lose your low promotional price and charge a new, higher APR instead.
The low or 0% introductory phase expires. Nothing lasts forever, and that includes introductory phases. For example, some cards offer an introductory APR of 0% for 12-18 months for fund transfers, but you must complete the fund transfer soon after opening the card. Then, when the intro period has expired, the interest rate rises sharply. The new higher rate applies to everything you still owe. So you need a plan to pay off your debt In front the introductory phase is running out.
Using credit transfers can make things worse. A big problem with “paying off” one credit card by switching to another is that you feel like you paid for it. But you have only postponed what you owe.
That’s a problem because you feel Relief when nothing has really changed. You can continue to do whatever you did to build up the debt from the start. And if you don’t stop using the old card, you could owe even more. So it is wiser to have made some progress with debt settlement before taking advantage of this type of offer.
Balance transfers are not a way of clearing debt. they can Be part of an overall debt settlement strategy, but they are not a way to do it alone. You must already be on your way to debt freedom.
That means you’ve stopped borrowing, set up an emergency fund, and are making good progress In front make a balance transfer. Once you make such progress, it’s great to look into ways to pay less interest as well.
Questions to ask yourself when thinking of making a funds transfer
When you have weighed the pros and cons and decided that a credit transfer is worthwhile in your case, ask yourself these questions too:
- Can I make payments on time? If this is not possible, a balance transfer will most likely affect your creditworthiness and it may be better to use other means to settle the debt.
- What is the interest rate on the new card?
- How long will it take to pay back my debts with my credit transfer? Can I pay it off before the introductory phase ends?
- Is there a penalty APR?
- How quickly do I have to transfer the credit?
Who can balance transfers work well for?
Funding transfers can work well for people who are already making progress in paying off debts. They can help get this done faster as part of your overall plan.
Who should avoid credit transfers?
Transfers are not for those who can’t make ends meet or who have problems with impulse output. And they shouldn’t be used when money is tight.
They are also not a solution if you don’t have a plan on how to withdraw the funds within the deadlines. (Or without accumulating further debt or interest.)
The bottom line
Credit transfers are worthwhile if they save you money, you can pay off your debts within the introductory phase and the advantages outweigh the disadvantages. (And you are otherwise in good financial shape.)
They can help you spend less on interest charges and pay off debts faster.
But they come with fees that in some cases may not be worth it. For example, when something goes wrong or you are new to managing your money.
Knowing yourself, planning ahead, and fully understanding the pros and cons is key.