The Pros And Cons Of Balance Transfer Credit Cards

A balance transfer moves debt from one account or credit card to another. Ideally the shift is made to an account or card with either an introductory 0% APR offer or one with a lower ongoing rate than the account you’re shifting your debt from.

A balance transfer credit card refers to a card that offers an introductory 0% APR offer for balance transfers. The offer is just for a promotional period of time, usually ranging from six to 18 months, although there are a few cards with even longer terms.

A balance transfer can usually save you money if you pay off the balance within the 0% interest promotional period. In other words, if you transfer a balance to a card with an introductory 12-month 0% APR and you pay off the balance within that period of time, you’ll save money compared to letting the balance ride on your original card and accrue interest.

Keep in mind that most balance transfer offers come with a balance transfer fee that’s typically 1% to 5% of the amount being transferred. But, even with that surcharge, if you pay off your bill within the 0% APR period, it’s still likely to provide a savings over the double-digit interest charged by most credit cards.

Read more: How To Do a Balance Transfer

0% Interest

The primary benefit of a 0% balance transfer credit card is the 0% introductory APR offer. This 0% interest period can help you carry your debt for a limited time without paying interest. The result is that all of your monthly payment goes to pay down the balance on the credit card.

For example, consider someone with $10,000 in credit card debt at an interest rate of 18%.

While the minimum payment will vary from one card to the next, a typical minimum monthly payment will equal about 2% of the outstanding balance. In our example, the minimum payment the first month would be about $200, and of that, $150 is going just toward interest payments.

Continue paying just the minimum payment each month and interest payments grow exponentially. In fact, it would take 610 months and $28,396.72 in additional interest payments to knock out the original $10,000 in debt. You can use Forbes Advisor’s credit card payoff calculator to see various debt repayment scenarios.

Transfer that balance to a card with a 0% introductory APR and the picture changes dramatically. With a 20-month 0% balance transfer card, for example, you could pay off this debt entirely without interest by making monthly payments of $500.

Debt Consolidation

A second benefit of a balance transfer card is consolidating your existing debt. If a consumer carries balances on several cards, merging the balances onto a single balance transfer credit card will remove the inconvenience of making multiple monthly payments.

Lower Credit Utilization

While a balance transfer can negatively affect your credit score in the short term, over time a balance transfer could actually increase your score.

This is because a balance transfer will help you decrease your credit utilization rate over time. The utilization rate compares your outstanding balances on revolving credit like credit cards to your available credit. Credit scores view a lower utilization rate as a sign of responsible credit use. A lower utilization rate also shows that a consumer has credit to use in case of an emergency.

With a balance transfer, your total credit increases by the amount of credit on the new balance transfer card. Assuming you don’t incur any more debt, your utilization rate will go down as you continue to make payments. While this is not a justification by itself to transfer a balance, It is a potential long-term benefit of using a balance transfer credit card.

While balance transfer credit cards can provide savings on interest, they also come with some potential risks and costs.

Balance Transfer Fee

Most credit cards will charge a fee for transferring a balance to their card. The fee is expressed as a percentage of the amount transferred. These fees will range and can reach up to 5% or more.

Ongoing APR

Before making a balance transfer, be sure to look at the regular ongoing APR of the new card once the promotional APR period expires. If the transferred debt is not paid in full before the 0% introductory APR expires, the remaining debt will be subject to the card’s regular APR. For many cards, this APR will vary depending on the applicant’s creditworthiness and could be even higher than the card you’re transferring from.

If you don’t think you’ll be able to pay off your debt within the promotional APR time period, compare the new APR with the APR on the card you’re considering transferring your debt from. If the new rate is higher, including factoring in the additional cost of a balance transfer fee, it could cancel out any progress you have made on reducing your debt and it may not be worth it to do a transfer.

In a case such as this, you can consider transferring only the amount of debt you expect to be able to pay off during the promotional period and leaving the rest on the original card with the lower APR.

Credit Limits

Even though you may have $10,000 in high-interest debt, it doesn’t mean the new balance transfer credit card will offer that much available credit. The amount of credit extended is based on a number of factors and varies from one issuer to the next. So be prepared to either transfer only a portion of your debt to the new card or to apply for multiple balance transfer cards.

Credit Inquiries

Although a balance transfer card can potentially improve your credit score in the long term, it can hurt it in the short term. That’s because credit scoring formulas consider recent applications for new credit. While a single new credit card application likely won’t lower a score significantly, applying for multiple new credit lines can. More importantly, if you will be shopping for a new loan like a mortgage in the near future, even a drop of a few points can result in a higher rate.

Excellent Credit Recommended

If you have a lot of debt and in turn have a high credit utilization, you may not qualify for many balance transfer cards. Typically, the best 0% balance transfer offers go to those with credit scores near or above 700.

Risk of More Debt

After you transfer your balance to a new credit card, you suddenly have more credit available. It can be tempting to continue to spend and to add more to your debt burden.

If you’re considering a balance transfer, first consider what’s a better fit for your needs: the longest time frame possible to pay down your debt or the smallest balance transfer fee you can find? You’ll also want to consider the usefulness of the card beyond the promotional period and any other card attributes that might be useful to you. Once you’ve calculated the amount of time you’ll need and have identified a card that offers a promotional 0% APR for a period of time that matches your particular circumstances, then a balance transfer will make sense.

Balance Transfer Offers

Here are some of Forbes Advisor’s favourite balance transfer cards:

• MBNA True Line® Mastercard®
• BMO CashBack Mastercard
• BMO eclipse rise Visa
• BMO Air Miles Mastercard
• Tangerine Money-Back Credit Card
• Scotiabank Momentum No-Fee Visa Card
• ManulifeMONEY + Visa Platinum
• Alterna Savings Cash Back Visa
• CIBC Select Visa Card
• Alterna Savings Cash Back Visa
• BMO Preferred Rate Mastercard

A balance transfer makes sense if the majority of your debt can be paid off before the promotional period on the new card ends, the new APR after the promotional period does not offset progress and any balance transfer fees fit within your debt repayment plan.

It pays to do the math when considering a balance transfer to another card before making a move.