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What Are the Benefits of a Balance Transfer?

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It may seem counter-intuitive to open a new credit card to solve a credit card debt problem, but a balance transfer card is not just intuitive, it’s a great option for reducing or eliminating high-interest debt.

A balance transfer card typically has a 0% or low interest rate for a limited time on balances transferred from other credit cards. The benefits of a balance transfer are debt consolidation, lower monthly payments, a lower interest rate and savings in the hundreds, or even thousands of dollars. A balance transfer can also boost your credit score.

The catch? Your credit must be good enough to qualify for an offer that saves money, rather than costs money. And there is a fee – usually 3%-5% of the balance transferred – you must pay. It helps your cause considerably if you can pay off the balance before the introductory period ends.

If your credit score isn’t above 700, you may not find an offer on a balance transfer card that makes financial sense. The card definitely won’t work if you use it to continue running up credit card debt, or don’t have the money to pay off the balance before the introductory period ends. If that’s the case, a different debt-elimination strategy would be a better fit.

Let’s take a look at balance transfer card benefits, risks, and success tips.

What Are Balance Transfers?

A balance transfer credit card typically offers a 0% annual percentage rate (APR) for 12-21 months on balances transferred from other credit cards. It’s a good way to consolidate and eliminate debt, because you’re no longer paying high compounding interest. One monthly payment is more manageable than juggling several and should be a much lower number than what you were paying on your high-interest credit cards.

The 0% offer is only good for an introductory period, after which the APR increases to somewhere between 18%-30%. Balance transfer cards come with a fee of 3%-5% based on the amount being transferred. For example, if you’re transferring $5,000 and the transfer fee is 3%, you’ll be paying off a balance of $5,125.

Credit card companies don’t allow you to transfer balances from their cards to a balance transfer card they issue, but there are many balance transfer cards available, so that shouldn’t be a problem.

When you research the best balance transfer card for your financial situation, look for one with a 0% interest rate. The length of the introductory period is also important. In many cases, the shorter the intro period, the lower the fees. If you think you can pay off the balance in a shorter intro period, go for it, and you’ll save a lot of money.

Be sure not to ignore what the APR will be once the intro period ends. If you can’t pay off the balance during the intro period, that interest rate could also end up costing you money.

Your credit score, how much you owe, and income will determine how much of a credit limit balance transfer card issuers are willing to offer you. Be sure to apply for one that has a credit limit high enough to transfer your highest-interest card or cards. If you have $10,000 in credit card debt, don’t sign up for a balance transfer card that has a $5,000 credit limit.

Most allow you to check your rate without officially applying for the card. Once you apply, it will mean a hard pull on your credit report. Too many hard pulls will lower your credit score, so make sure an offer looks good before you apply for it.

Offers vary depending on the credit card company, but the steps for transferring high-interest credit card balances to balance transfer cards generally are:

  • Choose a balance transfer card that meets your financial needs and apply online.
  • Review terms and conditions in depth before finalizing your application, making sure the introductory period, credit limit, fees and resulting monthly payment will save you money and work with your budget.
  • Include the balances you want to transfer, prioritizing the highest-interest cards. You will have to provide the company that issued the card, balance, and account number. The transfer card company will pay off the card’s balance.
  • Make on-time payments on the balance transfer card large enough to pay it off, or reduce it significantly, before the introductory period ends.

Benefits of Balance Transfers

When used correctly, a balance transfer card is a great way to reduce or eliminate debt, as well as make budget management easier, since you’ll have one monthly payment. You’ll save money in both the short and long run and improve your credit score.

1. Lower Interest Rates and Savings

Lower interest means hundreds, even thousands, in savings.

For example, if you pay $200 a month on a $5,000 credit card balance with a 25.99% APR, paying it off will cost $7,278 over 37 months. Pay $200 monthly on a balance transfer card with a 0% 18-month introductory rate, 3% fee and the $5,125 balance (fee included) would be eliminated in 27 months, costing you $5,288 overall. That’s’ a savings of $1,990. Paying it off in 18 months and you’ll save $2,153.

2. Consolidating Debt

Consolidating debt into one payment has both financial and psychological benefits. A National Institutes of Health study found that the “mental accounting” it takes to track debt and payments makes debt seem more overwhelming and takes a psychological toll. Fewer payments, even for the same amount owed, are easier to deal with mentally.

One payment, rather than several, also makes budgeting easier, which means you’re more likely to pay on time.

3. Improving Credit Scores

Improving your credit score is another balance transfer benefit. One way is improving credit utilization which is defined as how much available credit is being used. An ideal amount for a good credit score is 30%. For example, spend $300 on a card with a $1,000 credit limit.

Another benefit is the greater likelihood of on-time payments once credit card debt is consolidated. Late payments tank a credit score. On-time payments can improve it dramatically.

4. Cash Flow Management

With lower monthly payments, you have more cash on hand to pay other bills and expenses, as well as add to savings. More cash flow makes it easier to budget and plan short-term and long-term finances. It also means you won’t have to use credit cards for daily expenses, so you can avoid running up more debt.

Risks and Considerations

Balance transfer cards come with risks, particularly if your credit score is low, or you are in the habit of using credit cards frequently.

In general, a good credit score – 690 or higher – is necessary to find an offer that will make financial sense. The Consumer Financial Protection Bureau found that 98% of balance transfer card users had a credit score of 660 or higher and surmised that those with lower scores often don’t qualify for offers.

If you can’t find an offer with a low enough interest rate and fee to save money, a balance transfer card won’t benefit you. If you can’t pay the card off during the introductory period, you will end up incurring more debt and doing further damage to your credit score.

Another pitfall is using the card, or the paid-off cards, to make purchases or cash advances during the introductory period. In most cases, the introductory rate only applies to the balance transfers. The CFPB found that most balance transfer card holders use it for other purchases, adding to the balance at an interest rate that’s higher than the introductory rate.

Another way to blow up the benefits of balance transfer is to run up balances on the paid-off cards. The cards aren’t closed unless you ask for that to happen. Closing those accounts can hurt your credit score, since you’ll have less credit available, and your credit utilization will increase. You’ll also be eliminating established accounts, another credit-score hit. Ideally, you keep the old accounts open, and use them with care, paying off balances monthly. But it can be a slippery slope.

When considering using a balance transfer card to pay off credit card debt, do the research. Read the fine print – literally. Credit card websites have a section at the bottom, in small, fine print, which explains the fees, how the APR works, and how much the card will cost. Scroll down and check it out.

If you are sure the balance transfer card is right for you, plan to pay it off before the introductory period ends and make sure your budget can support not using it, or your other credit cards to pay day-to-day expenses.

Tips for a Successful Balance Transfer

A balance transfer card can be a great way to consolidate and eliminate credit card debt if you take the time to make sure it will work for you.

Some tips to make a balance transfer card a successful debt consolidation strategy:

  • Make sure the card will save you money. Do your homework and read all the terms and conditions associated with the card, so that you understand the costs.
  • Do the math, comparing balance transfer offers to what you currently pay. Use an online calculator to get accurate figures.
  • Create and maintain a budget that includes all of your monthly expenses and income, so that you will be sure you have the money to make balance transfer payments, as well as pay your other bills.
  • Pay the card off before the introductory period ends. Make sure you budget a large enough payment to do this.
  • Don’t use the balance transfer card to make purchases or get a cash advance.
  • Don’t use your other credit cards and run your balances back up. If you do use the paid-off cards, pay the entire balance every month.

It’s important to find a way to keep the end game – paying off debt – front of mind to stay on track once you have a balance transfer card.

Everyone responds their own way to motivation, but keeping a chart that shows your debt going down is a great way to be constantly aware of your progress. Seeing proof that it’s working can keep you from running up more debt.

If negative motivation works better, post on your refrigerator or bathroom mirror the amount you’d pay if you hadn’t transferred the balances and how long it would take you to pay it off, as well as the amount you’re saving. This is easy to find using online balance transfer calculators. Make a printout and post it, so you’re always reminded of why you aren’t using your credit cards.

It takes a while to develop new habits, so don’t be hard on yourself. Every month that you pay on time and don’t run up more debt makes your new habit stronger and more effective. Tell yourself that you don’t want to undo your progress by slipping back to bad habits. But if you do slip, it’s easy to get back on track. You know what to do and have the tools, knowledge, and resources to do it.

Leveraging Balance Transfers to Save Money

If you are considering a balance transfer to consolidate and pay off high interest credit cards, be sure to do your homework and create habits that will make it work, including:

  • Determine it has an APR and transfer fee that result in lower monthly payments, so you’ll save money.
  • Make sure you can afford monthly payments that allow you to eliminate the balance off before the introductory period ends.
  • Create a monthly budget you can stick to that focuses on making on-time payments and not running up more debt.

If your credit score isn’t high enough to make a balance transfer a good strategy for eliminating debt, contact a nonprofit financial advisor or credit counselor to discuss other options. They can help you navigate available debt management and elimination resources. Certified credit counselors at nonprofit debt management agencies will talk to you free of charge and are required by law to give you advice that’s in your best financial interest.

Some of the alternatives to balance transfer cards a professional may discuss with you are:

  • Debt consolidation loan: Debt consolidation combines several debts into one monthly payment that’s easier to manage, ideally with a lower interest rate. Aside from balance transfer, a common form is a debt consolidation loan. The advantage of a debt consolidation loan over a balance transfer card is that it’s paid off in a specific term, usually 3-5 years. It also doesn’t have the pitfall of leaving the door open to accumulate more debt.
  • Debt management plans: A debt management plan, offered by nonprofit credit counseling agencies, eliminates debt in 3-5 years. The agency has agreements with creditors to get lower interest rates and waive some late fees, allowing you to pay down your cards with one fixed monthly payment to the agency.
  • Debt settlement: Both for-profit and nonprofit debt settlement can reduce what you owe by 25%-50%. For-profit debt settlement can come with high fees, and it takes time to negotiate your payoffs, meaning that interest piles up and lack of payments hurts your credit score. Nonprofit debt settlement, also known as credit card forgiveness, has agreements with some card companies to reduce your balance by 40%-50%. It requires fixed payments over 36 months to eliminate the debt. However, it is a new program, and not all nonprofit agencies and card companies have signed on.

About The Author

Maureen Milliken

Maureen Milliken has been writing about finance, banking, investment, entrepreneurship, real estate and other related topics for more than 30 years. She started as the “Business Beat” columnist for the now-defunct Haverhill (Mass.) Gazette and currently is one of the hosts of the Mainebiz business-focused podcast, “The Day that Changed Everything” in addition to her daily writing. She also is is the author of three mystery novels and two nonfiction books.

Sources:

  1. N.A. (2023, August 28) What do I need to know about consolidating my credit card debt? Retrieved from https://www.consumerfinance.gov/ask-cfpb/what-do-i-need-to-know-if-im-thinking-about-consolidating-my-credit-card-debt-en-1861/
  2. N.A. (ND) Credit Card Balance Transfer Calculator. Retrieved from https://www.affinityplus.org/resources/calculators/credit-card-balance-transfer-calculator
  3. Ong, Q. et al. (2019, April 9) Reducing debt improves psychological functioning and changes decision making in the poor. Retrieved from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6462060/
  4. N.A. (2023, October) The Consumer Credit Card Market, pp. 115-117. Retrieved from https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2023.pdf