Are Balance Transfers the Best Way to Pay Off Debt?
If you have a tall stack of credit card debt and your interest rates are through the roof, a balance transfer could be a great option to consolidate your debt. It gives you time to pay down debt on a new card with a lower rate or, even better, with 0% APR.
However, a balance transfer may not be the only or best way to pay off debt. Depending on your specific situation, alternative debt consolidation options, such as a personal loan, may better integrate into your finances.
In this post, we will walk you through how balance transfers work, and compare the pros and cons of balance transfers and personal loans.
How does a balance transfer work?
A balance transfer is basically rolling over your debt from one credit card (or several) to another one. The point of this strategy is to move debt from a high-interest credit card to a card with a lower interest rate or, possibly, a card with a promotional 0% APR period. As a result, you could pay less in interest than you would if you kept the debt where it is.
To be able to qualify for a good balance transfer card, you have to have good to excellent credit. Most of the credit cards that offer 0% intro APR require a minimum credit score of 700. And you can’t be late on payments, which may cause the issuer to end your 0% APR promotion.
Although the 0% APR promotional window may be available up to a year or even longer, cards usually require you to transfer your balances within 60 days of the card opening. Not only does waiting mean you could miss out on the promotion, it also gives you less time to pay off the debt before the promotion ends.
Benefits of using a balance transfer to pay off debt
Many credit card companies offer you an introductory interest-free period when you open a new card, allowing you to transfer your balance over to the new card. The promotional 0% interest period typically lasts from 12 months to 21 months. On top of that, the new card may offer additional sign-up perks and long-term rewards.
You usually have to pay a one-time balance transfer fee, which is often 3% of the amount of the transfer. Some cards don’t charge intro balance transfer fees, allowing you to cut even more costs if you meet the requirements for the offer. Make sure you compare multiple cards to get the best possible deal.
You can find a list of credit cards currently offering intro 0% APR balance transfer promotions here.
When does a balance transfer make sense to pay off debt?
A balance transfer is an appealing deal, but — there’s always a but — a great deal isn’t easy to snag. And it comes with a couple of caveats.
A balance transfer makes the most sense when your credit score is high enough to qualify and you can pay off debt during the 0% APR intro period. If you can’t pay off your entire balance during the 0% APR intro period, once the deal ends, the standard rates you have to pay may be higher on balance transfer products than on other credit cards. Worse yet, you may be hit with all the interest you would have accrued during the intro period — known as deferred interest. You may end up spending more than you would have with other options. Keep in mind, you cannot transfer balances between credit cards issued by the same company.
This debt-consolidation strategy also may not work if you have an astronomical amount of debt.
Most cards set a maximum transfer. You may not be able to transfer your entire balance to a single card. For instance, maybe you have $8,000 in debt but only get a $5,000 credit line for one 0% APR deal. Or, if you have $8,000 and get approved for an $8,000 credit limit, you may still not be able to transfer the whole balance, once you factor in a balance transfer fee.
You could apply for another balance transfer deal, or more if you have a greater amount of debt to get the full benefit, but applying for several credit cards in a short period of time could hurt your credit score. Remember that the best balance transfer offers tend to require you have a good or excellent credit, and if you don’t have it, a debt consolidation loan may be a better option.
Balance transfer vs. debt consolidation loans: What’s best for me?
If you are looking consolidate your debt, have less than perfect credit but have good enough credit to qualify for a loan at a lower rate than your credit card, your better bet would be a personal loan.
Personal loans are unsecured loans offering a fixed amount of money at a fixed rate for a fixed amount of time. Say you have $8,000 of credit card debt: You could get a personal loan for that amount in one lump sum, use it to pay off the credit card debt, then make the fixed monthly payments until the end of the loan term.
When considering debt consolidation, it’s important for you to compare the potential costs that come with each method and to pick your most affordable option.
Pros of a balance transfer
- If you pay off your debt during the intro period — with the best deal of 0% APR — you can avoid interest charges.
- The new card itself may offer a sign-up bonus and/or long-term perks.
- Some cards charge $0 intro balance transfer fees, allowing you to cut costs.
- No prepayment penalty.
Cons of a balance transfer
- You need a good or excellent credit score to qualify the best offers. (Generally 700 and up).
- You can’t transfer balances between cards from the same credit card issuer.
- In most cases, you have to pay a balance transfer fee — typically 3% of your total transfer amount.
- If you can’t pay your balance before the intro period ends, you will have to pay debt on the standard APR, which may be higher than the APR on your old card or on a personal loan. Depending on the bank, you may also have to repay all the interest you would have accrued during the intro period.
Pros of a Personal Loan
- You can pre-qualify for many personal loans without hurting your credit score. This will allow you to shop around for the best rates.
- It has a fixed rate, so your monthly payment is predictable.
- There’s no balance transfer fee. However, lenders may charge a loan origination fee. It’s important to compare costs charged by personal loan lenders and credit card companies to find your best option.
- In general, you will have 24 to 60 months to repay your loan, a longer term than the typical balance transfer credit card intro period.
- You may qualify for personal loans even with poor credit, although that may result in a higher interests rate.
- It can help you build or improve your credit by adding another line of credit to your credit report. As long as you make on-time payments, you can expect your credit to improve over time.
- No prepayment penalty.
Cons of a Personal Loan
- It carries an interest rate, which varies by lender and your qualifications but is usually lower than credit card interest rates. According to data from the Federal Reserve, the average personal interest loan rate was 10.22% in the first quarter of 2018, compared with the average 15.32% rate on credit cards that carried balances.
- Many lenders charge an origination fee, which is often a nonrefundable and upfront fee paid before you receive the loan, or it will be rolled into your loan balance.
What to watch out for when using a balance transfer credit card
Before opening a balance transfer card, make sure you assess your debt and understand the terms and conditions of the card. There are a few things you need to watch out for when applying:
- Fees. A typical balance transfer card charges 3% of the amount of money you’re actually transferring over, but some cards have $0 transfer fees.
- Interest rates. Once the promo period ends, the standard interest rates may or may not be higher on balance transfer products than on other credit cards. You may also get hit with all the interest you accrued during the intro period.
- Promotional period. The promotional period typically ranges from 12 to 21 months. But you may have to request transfers within 60 days of account opening.
- Adding to your debt. Some balance transfer cards rule that the intro APR is for the transferred balance only, and new purchases collect interest at the regular, higher APR. Be careful about adding to your balance while you’re trying to get out of debt.
— View our best balance transfer credit cards here!
I’ve picked my balance transfer credit card. Now what should I do?
Congratulations on getting the new card, but don’t get too carried away — the clock is still ticking.
You need to discipline yourself with a budget. An effective budget can help you make debt payments in full by the time the intro offer ends and help control your spending. Speaking of which, remember that you opened this card to pay off high-interest credit card debt, and it should be strictly used for this purpose — don’t spend on this new card. As discussed earlier, new purchases may not qualify for the 0% APR. You may just end up getting caught in the cycle of high-interest debt all over again if you can’t resist the temptation to splurge on the new card.
Divide your outstanding balance by the remaining number of payments in your intro period to figure out how much you need to pay each month to get out of debt before it ends. If your intro APR is higher than 0%, use a debt payoff calculator to figure out your payments. Once you do that, set up automatic payments for that amount. You can always adjust your autopay amounts if needed.
Finally, don’t close your old credit card. Closing the card could reduce the average age of your credit history as well as reduce your overall available credit, both of which factor into your credit score.