Is a Balance Transfer Right for You?

Are high-interest rates on credit cards making it hard to pay down your debt? Would you struggle less if your payments decreased your balance just a bit more each month?

A credit card balance transfer, which involves moving debt from one credit card to another, might be the solution. Typically this is done to take advantage of a lower interest rate or a 0% introductory Annual Percentage Rate (APR). A balance transfer may help you save on interest and pay down debt more efficiently.

By moving debt to a card with a lower interest rate, you may be able to save money and pay off the balance faster. However, it’s not the right move for everyone. Before making the decision, here are the pros and cons of balance transfers.

Pros

• When debt is moved from a high interest rate credit card to a lower APR, the total interest paid is also lowered and as a result more money goes to paying down the debt. Ideally you want a card with zero percent APR, so every dollar goes to the debt allowing it to be paid off more quickly.
• Multiple payments for multiple credit card loans can be consolidated into one, making it easier to manage and keep track of payments.
• Sometimes zero percent APR cards provide rewards, but you might want to pay off your debt before making purchases on the new card.
• The old credit card remains open. As a result, your credit card score may eventually improve because you’ve reduced your credit utilization ratio, which is how much you currently owe divided by your credit limit.
• Transferring balances from one credit card to another doesn’t get you out of debt but it can be part of an overall get-out-of-debt strategy.
• A balance transfer may help you avoid setting up a hardship payment plan with the credit card company. A hardship plan may lower your credit score, cause your credit card to be frozen for the duration of the hardship plan, or extend your borrowing terms and increase the total interest you pay.

Cons

• If you don’t have good or excellent credit, usually a score of 670 or higher, you may not qualify for the best balance transfer credit cards offers. A low credit score, history of past due payments as well as bankruptcy will rule you out as qualifying for this type of credit card altogether. If you can’t qualify for a balance transfer credit card, speak to your financial planner about whether a debt consolidation loan or asking your credit card company about a hardship plan makes sense for you. Hardship plans may waive fees and decrease interest rates for a few months.
• The bank may limit the amount you can transfer. Based on your credit score you may have $16,000 of credit card debt to transfer, but the bank issuing the new credit card may only allow $5,000 to be moved.
• Some credit card companies require proof of income as part of the balance transfer.  Some require specific debt to income ratios or credit utilization of less than 30 percent. It is often wise to review all the requirements prior to applying.  Pre-qualification may be useful to determine whether you will qualify.  Websites like Credit Karma, Experian and NerdWallet may be helpful in screening and understanding if you will qualify for a new card.
• Even if the balance transfer card chosen has a zero percent APR, there may be a balance transfer fee of three to five percent or a minimum fee. Not every card charges a transfer fee, and some do offer both zero APR and no transfer fees, so make sure to shop around for the best deal.
• The introductory offer has a time limit, usually 12 to 21 months. After this period, the APR could be higher than what your current card is charging. The card issuer won’t remind you when the higher interest rate takes effect, so make sure to keep track of the date.
• A balance transfer can make the problem worse if you’re just moving money around. Changing spending habits and having a debt management strategy is key to the success of balance transfers. The temptation to overspend by using a now empty credit card may still exist.
• Your credit score could temporarily drop by as much as 10 points due to the new card triggering a hard inquiry. If you plan to apply for major financing, such as a new car loan or mortgage, applying after a balance transfer could negatively affect your ability to secure the financing.
• If you can pay your debt back relatively soon, a balance transfer might not be worth it if there is little to no cost savings.
• If you can’t make the payments when they are due, you may forfeit the zero percent APR, which can rise to as high as 29.99% plus late fees.
• If your debt is out of control, a balance transfer could just be a temporary band-aid. Instead speak to your financial planner about debt management plans and non-profit credit counseling.

Overall, a balance transfer may be worth considering if you:

• Have resolved the issues that caused the credit card debt in the first place.
• Understand your budget and what you contribute to paying off the debt each month.
• Are not applying for a major loan in the near future.
• Possess a good credit score.
• Don’t foresee a financial disruption in the next 12-21 months.
• Can pay your new credit card debt on time.
• Feel your debt is not hopeless, just a bit of a challenge.
• Are using it as emergency measure to park debt after a job loss or other financial crisis.

To estimate what the savings in interest might be, you can use a credit card balance transfer calculator found on NerdWallet and other websites. Then make sure to speak to your financial planner to ensure you will see the potential savings and are looking at the total picture of your finances. With some research and the help of your financial planner, you can decide if a balance transfer is right for you.