What Are the Pros and Cons of Balance Transfers?
When you move debt from one credit card to another this is called a balance transfer. Balance transfers typically take place when someone gets a new credit card as issuers may offer a low introductory APR on transferred balances to attract new customers.
There are various ways that a balance transfer could save you money and provide more financial flexibility. But they also have their fair share of potential downsides. If you're considering a balance transfer, here are the most common pros and cons that you'll want to think through.
Pros of balance transfers
Wondering if a balance transfer should be part of your get-out-of-debt plan? Here are five benefits that can make them an attractive option:
- They may offer several months of 0% APR. Many balance transfer offers come with a 0% introductory APR period of at least 12 months and some of the best balance transfer cards offer 18 months or more of zero interest. Depending on the rate you're currently paying, this could save you hundreds or thousands of dollars in interest charges during the promotional period.
- You can use them to consolidate your debts. If you have several credit cards with smaller balances, you might be able to move two or more of them to your new card. This would simplify your payment schedule in addition to helping you take full advantage of your new card's introductory rate. Learn more about debt consolidation.
- There are no collateral requirements. Unlike certain types of loans, credit cards are typically an unsecured form of debt. This means you can take advantage of balance transfer offers without putting your home or other personal property at risk.
- Your longer-term interest rate could go down. While it's preferable to pay off your outstanding balance in full during the intro period, this may not always be possible. However, if your new credit card has a lower standard interest rate than what you're currently paying, you'll be better off even after the promotional period ends.
- They may offer rewards. A few of the best reward cards today also feature 0% APR balance transfer offers. However, it should be noted that the balance transfer cards with the longest promotional periods tend to have thinner rewards programs or none at all.
Cons of balance transfers
Although they offer several potential advantages, balance transfers won't be right for everyone. Here are a few drawbacks that could outweigh the benefits for you.
- Many cards charge balance transfer fees. The vast majority of balance transfer cards charge cardholders a fee for the service. Balance transfer fees typically range from 3% to 5%. That means you can expect to pay $30 to $50 in fees for every $1,000 transferred. That extra cost will need to be considered as you're calculating the value of a balance transfer.
- Strong credit may be required. Balance transfer card issuers are typically looking for borrowers with healthy credit. If your credit is poor or damaged, it may be difficult to qualify for the best offers. Learn the credit score ranges.
- High credit limits aren't guaranteed: Unfortunately, you won't know your balance transfer card's credit limit until after your application has been approved. If it's less than the current balance of your existing card(s), you'll only be able to transfer a portion of your outstanding debts.
- Your long-term interest rate could go up. Low introductory interest rates are great, but they don't last forever. And if the standard interest rate on your new card is higher than what you're currently paying, it could still cost you more in the long run.
- They can lead to more total debt: By adding another card to your life, you'll be increasing your total credit limit. And that could be a temptation to go on a spending spree and pile on more cumulative debt. Canceling your old card after the balance transfer is completed could help you avoid this pitfall. But you'll want to considerhow closing a credit account could affect your FICO Score.
How the coronavirus has impacted balance transfer offers
In April 2020, the Federal Reserve noted that banks started tightening their credit standards late in March as the coronavirus pandemic began to rock the economy. And this "tightening" seems to have affected the number of balance transfer offers that credit card issuers are willing to make.
Multiple card issuers have taken down some of their most popular balance transfer cards from their websites. And one major card company has pulled back on balance transfers in a major way, with none of its cards currently offering 0% APR balance transfer promotions.
Despite these examples, the good news is that there are still several credit cards available offering 0% balance transfer periods of 15 months or longer. And even some of the most popular rewards cards still include generous balance transfer offers.
Is a balance transfer right for you?
If you have healthy credit and you think that you'll be able to pay down a significant portion of your credit card balance during the promotional period, a balance transfer could certainly make sense. Check your FICO Scores today to help you decide if balance transfer offers are worth pursuing.
Clint Proctor is a freelance writer and founder of WalletWiseGuy.com, where he writes about how students and millennials can win with money. His work has been featured in several major publications including Business Insider, U.S News and World Report, Yahoo Finance, and Forbes.