Is a Balance Transfer Card a Good Idea?
When it comes to credit card debt, your best bet is to always pay your balances off in full each month. That way the interest rate becomes irrelevant. However, this smart advice may not be particularly helpful or realistic at this moment if you are already faced with a pile of unpaid credit card debt.
You probably already know that credit card debt is bad for your credit scores, not to mention bad for your wallet. If you currently owe more than you can afford to simply pay off what you really need is a plan – a debt elimination plan. That, in turn, will become a money savings and score improvement plan.
The balance transfer is one such strategy many people use to try to eliminate credit card debt more quickly and less expensively. Of course, like any debt elimination plan, balance transfers have some pros and cons.
Pro: You Could Save Money
Probably the biggest perk that a balance transfer card has to offer is the chance to save money. Credit card debt is notoriously expensive with interest rates routinely at 17% and higher. With such high rates it could take you years to finally pay off your debt, especially if you are only making the minimum payment each month.
Balance transfer offers typically feature a low or 0% interest rate for a fixed, introductory period of time. For example, if you open a new credit card account with a balance transfer offer you might be able to take advantage of 0% interest for 12-18 months. If you are able to discipline yourself to pay off your credit card debt during that 0% interest period then you would save a ton of money which would have otherwise been wasted on interest fees.
Keep in mind that most balance transfer offers charge a transfer fee of 2%-5%. If you were to transfer $10,000 in credit card debt to a new account with a 5% transfer fee then the balance transfer would add an additional $500 to your debt. However, even with balance transfer fees you could still save a lot if you managed the process correctly.
Con: Without Discipline You Could Have Bigger Problems On the Horizon
If you do not break the habit of overspending, a balance transfer probably is not going to help you. In fact, it could set you up for even bigger financial and credit problems in the future. A balance transfer only works well if you can make a budget for yourself and stick with it. If you do not think that you can commit to paying off your debt before the special introductory rate expires then a balance transfer may not be your best choice.
Pro: Your Credit Scores Might Improve
Your credit scores are heavily influenced by the amount of credit card debt which appears on your credit reports and how that debt relates to your credit limits. This relationship between credit card balances and limits is known as your revolving utilization ratio. As your balances increase, your revolving utilization ratio rises – and that’s bad for your credit scores.
When you open a new credit card account to transfer your outstanding credit card balances your revolving utilization ratio will typically decrease. As a result, your credit scores should benefit, though not as much as they would benefit if you were to pay your credit card debt off in full.
Con: You Might Not Qualify
Credit cards with attractive balance transfer offers are typically only going to be available to you if you have good to excellent credit. Unfortunately, if your credit reports are currently blemished (i.e. late payments, collection accounts, charge-offs, etc.) then you probably won’t qualify for a new credit card account with a 0% interest balance transfer offer.