(This article was updated in January 2019)
If you’re having trouble paying back your credit card debt because of high interest rates, it may be time to switch to a zero-rate balance transfer card. Of course, these credit cards have their pros and cons so it’s important to evaluate the advantages and disadvantages of balance transfer cards to decide whether you need one. This article takes a detailed look the risks and benefits associated with balance transfer cards, and if you choose to get one, we talk about how to make sure you choose the right one.
When you may need a 0% balance transfer credit card
It can be difficult to repay your credit card debt sometimes because interest charges quickly add more debt to your account each month the credit card bill isn’t paid in full. Knowing full well that it is a good idea to repay debt as quickly as possible, it can still be a challenge to get the credit card balance down to zero. This is because credit card debt is high-interest, short term consumer debt (high-APR debt), and every month the credit card bill is not cleared, the company adds more interest to your outstanding debt, which is called ‘accrued interest’. In some cases, credit card interest rates are as high as 18%, simply because credit card debt is considered short term debt. One way to ensure faster debt repayment is to reduce the interest rate being charged on the credit card, which we discussed in a recent article. This will slow down the rate at which your debt multiplies every time you make a partial payment of the credit card bill. You may be interested in reading our detailed negotiation script for getting your credit card APR reduced. On some occasions, credit card companies refuse to lower your interest rate, and that is when you may think of other ways to beat the debt burden. Among options such as debt consolidation and debt relief, is the option of transferring your credit card debt to a ‘zero-rate balance transfer card’, where you move all, or part of, your high-interest rate debt to a low-interest (or zero percent interest) credit card in order to drastically cut or remove your accruing interest fee. The zero-interest-rate offer is only valid for a few months, but this feature of balance transfer cards can yield plenty of savings while you focus on reducing your debt.
Is it a good idea to do a balance transfer? Some benefits to look out for
There are three basic advantages of shifting your outstanding credit card debt to a balance transfer card:
- It can save you hundreds of dollars, depending on the size of your debt. Thanks to the zero interest rate of balance transfer cards, your debt will not multiply each month as you make arrangements to repay it.
- Faster debt repayment will result in the absence of interest charges so you can reach financial independence sooner!
- You make only one monthly payment if you move all your debts to the balance transfer card, making it easier from an administrative point of view.
Downsides of using a balance transfer card
The 0% interest rate feature on balance transfer cards is certainly enticing but there are certain strings attached that protect credit card companies from losing money. After all, they make money by charging interest fees on debt. These ‘strings’ are usually mentioned in the fine print, so be sure to read the full terms and conditions of your balance transfer card to be aware of the true cost of the card.
- A lower credit score will result each time you apply for a balance transfer card. For this reason, a balance transfer card should not be your first choice when try to get a lower interest rate on your credit card – you should simply ask your credit card company to lower it for you using the reasons we shared previously. In fact, there is sometimes a credit score threshold that must be met to qualify for the balance transfer card, which deters consumers from constantly moving their credit card debt to new balance transfer cards each time the promotional period expires, in a bid to continuously avoid paying interest charges.
- You may end up with more debt if you do not clear your balance during the introductory period. There is little incentive to repay the entire debt when the interest rate is low along with the low minimum payments, and when the introductory period expires, your debt will subsequently multiply at a much higher interest rate, which could be a lot more than your previous credit card’s interest rate. You may also accumulate more debt if you make new purchases using your balance transfer card instead of clearing out the old debt balance that you transferred.
- You may not get the advertised if your credit score is already low, and the credit card company will then charge you the regular interest rate that might match or exceed your previous interest rate. When you apply for a balance transfer card, make sure you qualify for the lower interest rate during the introductory period by checking the fine print for details.
- The introductory APR of your balance transfer card may be cancelled if you fail to make the minimum payment during the introductory period or do not follow the required order of debt payments. The new interest rate may be higher than your old credit card’s interest rate, making the balance transfer card an expensive choice for reducing debt.
Should you get a balance transfer card? Looking at the long-term benefits
Considering all the pros and cons of balance transfer cards that we shared above, it is clear that you need to carry out a proper analysis to determine the true cost of debt repayment to figure out whether the card will do you any good in the long term. Of course, the zero interest rate offer is an attractive one, but it is only beneficial in the short run because the promotional APR do not last more than a few months. The long term impact of using the card can be detrimental if one factors in the affect on the credit score, balance transfer fees, standard interest rate after the promotional period has expired and the risk of accumulating more debt if the transferred debt is not promptly cleared during the promotional/introductory period. Keeping all this in mind, the rule seems to be that if you have to means to repay the debt without taking out more debt, within the introductory period, a balance transfer card may be a good idea. Bear in mind that:
- You only have a limited amount of time to repay the debt (perhaps a year or two at most) after which you will be charged with a higher interest rate. You must promptly repay the credit card debt, therefore, in order to truly benefit from the zero interest rate credit card deal.
- A balance transfer fee is usually charged on the credit card debt, so that figure must be factored into your decision.
- The promotional APR may be withdrawn if certain conditions of your balance transfer card are not met, such as minimum payment targets and required order of payments.
- A higher, standard interest rate may apply to any purchases you make with the balance transfer card, even during the introductory period,
- Your credit score will take a hit when you apply for a balance transfer card, but that can be improved using various techniques.
- The credit limit of the balance transfer card should be high enough to incorporate your debt.
In summary, balance transfer cards have the potential to save you a lot of money, and if you have the funds to repay a significant portion, if not all, of your debt during the introductory period, the risks may well be worth it.