Are you ready to learn the good, bad and the ugly about using credit card balance transfers in your debt payoff? Is using a 0% APR Balance Transfer worth it?Let’s talk about what a balance transfer is and how some people leverage balance transfers in their debt payoff. Then we’ll look at what the catch is and figure out if it is a good idea for you.
What is a Balance Transfer?
You’ve probably received balance transfer offers in the mail. You may have wondered why a credit card company sent you several blank checks. Unless you read your junk mail, it probably went straight to the trash.
A balance transfer is a way to move debt from one source (or several sources)to another. Credit cards with a low introductory APR entice people to move their balances onto the new card to save money on interest.
Credit card companies send out balance transfer offers just like another business would send out promotional flyers and coupons. They are looking for new customers and hoping you’ll be one of them, so they are willing to give you a great “doorbuster” or “loss leader” to get your attention.
How can a Balance Transfer help me pay off my debt?
If you have debt with a high interest rate, you can transfer all or part of the high-interest debt to the low-interest credit card. You will still have the same amount of debt, but the balance transfer credit card gives you a window of time in which the interest rate for the transferred portion is much lower (ideally 0% APR).
In order to use the balance transfer to your benefit, you should not transfer more debt onto the new card than you can reasonably pay off during the introductory period. Be sure to take all fees into consideration when deciding if a balance transfer can save you money. Also, be aware of the time frame during which the transfers must be made and how long the introductory period is.
What’s the catch?
The first catch is that after the introductory period the rate goes up significantly. The introductory period lasts for a minimum of 6 months up to 18 months or longer, then the interest rate goes up to the card’s normal rate, which is likely higher that you are paying now. Any balance remaining will be subject to the high interest rate.
The second catch is that balance transfers usually have a fee. The industry standard right now seems to be “$5 or 3% of the amount of each transfer, whichever is greater”. As far as I can tell, the $5 is just there to trick people into thinking the fee is nominal. The 3% will always be greater, unless you are transferring a balance less than $165, in which case, you should just pay off the balance! There are some cards with no balance transfer fee, so be on the lookout for those!
The third catch is that you need to have perfect behavior. You will still have a minimum monthly payment which is based on your balance. Be sure you are able to make at least the minimum each month. If you miss a payment or are late, your introductory period could be cut short and you would be hit with the higher normal interest rate. Be sure to read all the fine print.
Another catch is that balance transfers bring new temptations. You might be tempted to:
- feel a burden lifted, when in reality you still have the same amount of debt
- delay paying off the new credit card because the introductory period seems like a long time
- make new purchases with the card and rack up more debt, which is especially tempting when card companies offer 0% APR on new purchases as well
Credit card companies know that, while most people have good intentions of paying off the balance before the introductory rate ends, most will end up paying interest either on the old debt that they transferred or new purchases on the card.
Depending on what kind of debt you are transferring, you could be going from “safe” debt to more risky debt. For example, if you die, your federal student loans are forgiven. However, if you die with credit card debt, it will come out of your estate, which would affect your spouse and family. Federal student loans are also considered “safe” debt because you are locked into an interest rate, whereas credit card interest rates are volatile (and higher than federal student loan rates). Federal student loans have deferment plans, income-based repayment plans, and other loan modifications unlike credit card debt.
Is a 0% APR balance transfer a safe move for someone already in debt?
The answer depends on who you ask, but more importantly on who you are. For some people balance transfers are wonderful, for others, they are destructive.
Before deciding if a balance transfer is right for you, you must already have an established debt-payoff plan. If you aren’t currently motivated to make a plan for paying off your debt, your motivation will not improve with a balance transfer. In fact, the false sense of relief may even decrease your motivation.
When looking at your plan to decide how much debt to transfer, be conservative and err on the side of transferring too little. It would be much better to get the balance transfer card paid off early and forgo the interest you would have saved had you transferred more, than to transfer too much and end up with a high interest rate.
Some people play the balance transfer game to the extreme, rolling debt from one balance transfer card to another to another to keep from paying interest on debts. That is way too risky for my liking. That plan could backfire in so many ways, and would likely destroy your credit score in the process. Also, unless each card is fee free, you end up paying 3% of your balance in transfer fees over and over again.
It’s Your Turn!
- Have you ever used a balance transfer to help in repaying debt? How did it work out for you? What did you learn?
- Would you consider using a balance transfer in your debt repayment or does it sound too risky?
UPDATE: I have since written about our experience in using balance to pay off student loans.
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