Pros and cons of a balance transfer

When your monthly credit card payments are barely scratching the surface of your overall balance, it can make your debt feel overwhelming. The good news is that you might not have to keep battling with a steep credit card bill and a balance that won’t budge. Instead, you could benefit from a balance transfer credit card if your credit is still in good shape.

The low or zero percent introductory annual percentage rate (APR) could help you pay off your credit card balance faster, save you money on interest and even improve your credit score. But despite all the benefits of a balance transfer, it still may not be the right move for you once you consider the downsides like the balance transfer fee. We’ve interviewed some experts to talk about the pros and cons of a balance transfer, so you can decide whether a balance transfer is the right move for you.

Pros of balance transfers

If you are eligible, you can stand to gain a lot from a balance transfer. Here’s a rundown of the biggest advantages:

You’ll pay less interest

The most important reason to pursue a balance transfer credit card is to take advantage of a low or 0 percent introductory APR offer. By transferring your debt to this new card, you start saving on interest immediately. Every payment you make goes directly toward reducing the amount you owe, which makes the balance transfer credit card a valuable tool for becoming debt-free. When more of your monthly payment goes towards the principal, you’ll pay off your debt faster and pay less interest overall.

You can consolidate debt payments

Depending on the credit limit you’re granted, your new credit card may allow you to transfer multiple credit card debt balances onto one card. In turn, this streamlines your finances by allowing you to consolidate multiple payments. If you’ve been struggling to manage several due dates and payment amounts, this is extremely helpful.

“If you are dealing with multiple credit card debts, transferring all balances onto one card simplifies your financial management. You’ll now deal with just one monthly payment, making it easier to track and less likely for you to miss due dates,” Sudhir Khatwani, founder of The Money Mongers, says.

You can capitalize on the perks of a new card

The best balance transfer credit card you choose could offer more than a 0 percent intro balance transfer APR. It may also offer better overall benefits — possibly including cash back, rewards, discounts and more.

“New generations of cardholders are used to … moving from one service to another, like streaming, cable and cell phone providers. They may also feel they are not getting the full benefits or services from an existing issuer. Changing cards and transferring balances can often yield better rewards — for example, an airline card that rewards airfare miles,” Martini adds.

Your credit score may improve

Dennis Shirshikov, head of growth for Awning.com and a finance professor at the City University of New York, notes that “a side benefit of transferring a balance to the right card is improving your credit score by reducing your credit utilization ratio.”

Your credit utilization ratio measures the amount of credit you are using versus the amount of credit that is available to you. It is typically expressed as a percentage and is calculated by dividing the total amount you owe in revolving credit accounts by the total credit limits of those accounts.

When your credit utilization is high, which means you are using a large portion of your available credit, it can negatively impact your credit score. Opening a balance transfer credit card will lower your credit utilization ratio because you’ll have more available credit and will be paying down your balance without adding interest to it.

Cons of balance transfers

On the other hand, balance transfer credit cards have their downsides. If you find that the disadvantages outweigh the pros, then you may want to consider balance transfer alternatives. Here are several caveats to watch out for:

You may not qualify for a worthy card

To be eligible for the best balance transfer credit card offers, you usually need to have good or excellent credit. While there are options for balance transfer cards if you have bad credit, they are typically lacking compared to the best cards out there. If your score is in a lower range, you may not qualify for a card with a 0 percent intro APR offer, and if you do, it might not have the best terms.

Instead, a debt management plan might offer some relief. These plans are offered by credit counseling agencies and provide benefits like lower interest rates and a single monthly payment which helps you pay off your debt faster without requiring a minimum credit score.

A balance transfer fee will likely apply

Depending on the terms of the card you’re considering and its current promotion, you may have to pay a balance transfer fee. This fee is usually 3 percent to 5 percent of the total transfer amount and may be subject to minimum fees. For example, if you transfer a $1,000 balance to a balance transfer card with a 5 percent transfer fee, the total amount you will need to pay down is $1,050.

Negotiating or avoiding balance transfer fees can be challenging, but there are credit cards available that don’t charge balance transfer fees. In addition to a handful of balance transfer cards offered by major issuers, some credit unions also offer cards with no balance transfer fees.

You could make the problem worse

The truth is, with a balance transfer card, you’re simply moving money around without necessarily improving your debt problem. In fact, if you don’t practice good financial spending and repayment habits, you could make the problem worse.

“Know that a credit transfer is not free money to extend paying off your open balance. It’s only a[n] … opportunity to save money and pay off a balance,” cautions Martini.

Having a new card may entice you to charge even more, especially if your new balance transfer card also offers a 0 percent intro APR on purchases. 

“Without discipline and a plan, a balance transfer can tempt you to accrue more debt, exacerbating your financial situation,” warns Andrew Latham, a certified financial planner.

Take control of your spending by creating a realistic budget that tracks your income and expenses responsibly. Avoid impulse purchases and try to pay more than the minimum amount due on your credit cards each month.

The introductory APR offer won’t last forever

It is important to remember that 0 percent intro APR offers typically expire 12 to 21 months after opening the card. That provides a limited window of time in which to benefit, but it can also provide a false sense of security.

“It’s important to read the fine print, as it varies per [offer],” says Martini. “Before initiating any balance transfer, understand how long the new issuer is offering you the 0 percent or low interest rate. For the transfer to work in your favor, you must pay off the balance before the end of the introductory rate.”

And once the introductory offer ends, the remaining balance could be subject to a higher interest rate than you had before. To ensure you pay off the balance before the intro period ends, make a plan using Bankrate’s credit card balance transfer calculator to determine the monthly payment amount that will help you reach your goal.

Your credit score could drop

Each time you sign up for a new credit card, your credit score may drop by up to 10 points — possibly for several months. That’s because applying for a new card usually triggers a hard inquiry which can temporarily lower your credit score. Other factors like using more of your recently freed up available credit or closing your paid off credit card could also lower your credit score.

If you’re worried about your score dropping, keep in mind that it’s temporary. You could also avoid the extra hit to your credit score by creating a payment plan with your credit card company. This looks like automating payments or making smaller, more frequent payments that are easier to manage.

You might not qualify for a loan

If you’re planning to apply for a mortgage, auto loan, home equity loan or personal loan in the near future, be cautious about getting a balance transfer credit card now. As mentioned above, applying for such a card might temporarily decrease your credit score by adding a hard inquiry to your credit profile. This could make it harder to get approved for the loan you want or secure a low interest rate. In this case, it may be helpful to stick with your current credit card but make larger or extra payments regularly to reduce your debt faster.

Alternatively, you might consider using a portion of your personal or home equity loan to consolidate and pay off your higher-interest credit card debt.

“Personal loans are available, often easy to get and usually have a much lower interest rate than any credit card,” suggests Martini.

When should I get a balance transfer card?

Getting a balance transfer isn’t a one-size-fits-all solution for dealing with credit card debt. A balance transfer could be a bad idea in the wrong situation.

But if you’re experiencing these circumstances, a balance transfer card might be a good idea:

• You’ve resolved the issues that contributed to your credit card debt.
• You thoroughly understand your budget and know exactly how much you can contribute to paying off your debt each month.
• You’re not applying for a major loan like a mortgage or car loan anytime soon.
• You still have a healthy credit score.
• You don’t foresee any financial disruptions for the next 12 to 21 months.
• Your credit card debt doesn’t feel hopeless, just challenging to deal with.

“A good candidate for a balance transfer card is someone with a good to excellent credit score who is eligible for cards with the best terms and rates,” Latham says. “They are also disciplined and committed to paying off their balance within the promotional period, and they view the balance transfer as a tool to manage debt — not an excuse to incur more.”

If that’s not you, you may want to reconsider a balance transfer credit card even if the 0 percent introductory offer seems like an opportunity you can’t pass up. Instead, you may want to evaluate your finances and address the root of your credit card debt or try other options for tackling your debt.

The bottom line

While a 0 percent APR offer can help you make great strides toward paying off credit card debt, it can also come with some downsides like temporarily lowering your credit score. Before pursuing a balance transfer credit card, carefully assess your financial situation — including your ability to repay and qualify for the new card. Check out Bankrate’s Cardmatch™ tool to match with balance transfer cards that fit your credit profile and financial goals.