THIS POST MAY CONTAIN AFFILIATE LINKS. PLEASE SEE MY DISCLOSURES. FOR MORE INFORMATION.
Balance transfers can be a great way to help you out financially when used correctly.
But if you use them wrong, they can quickly ruin your finances.
Before you decide to go down this road, it is important you understand the pros and cons of balance transfers.
Knowing the pitfalls can save you headaches and hurting your financial future.
And on the other hand, knowing how you can use them for your benefit can help you quickly improve your finances.
Table of Contents
10 Critical Pros And Cons Of Balance Transfers
5 Pros Of Balance Transfers
Balance transfers have many benefits, from saving you money to helping you get out of debt.
Here are the biggest advantages of balance transfers you need to know.
#1. Ability To Consolidate Debt
A great thing about a balance transfer is you can consolidate high-interest debt onto one credit card.
So other credit card bills, a personal loan, or other debt can be consolidated.
And even if you don’t have debt with a high interest rate, it can still make sense to move debt if the credit card balance transfer offers a lower rate.
While you could keep paying each debt off separately, it is a nightmare to keep track of all your bills and making sure you pay each one on time.
By combining them into one monthly payment, you save yourself a lot of time and hassles.
#2. Save Money On Interest
In most cases, a balance transfer will offer a lower interest rate than you see on standard purchases during the introductory period.
If you have an excellent credit score, you could even see balance transfer offers offer a zero interest rate.
This could end up saving you hundreds of dollars on interest charges on your credit card debt.
The only debt you wouldn’t want to transfer is student loans.
This is because you can write off student loan interest off your tax return.
#3. Great For Short Term Expenses
While not often recommended, you can use a balance transfer credit card to help you fund a short term expense.
For example, let’s say you need $1,000 right now but you don’t have the cash.
You could use a pay day loan but your interest rate will be astronomical.
If you charge it to your credit card, your standard purchase APR will apply, which could be as high at 18%.
On the other hand, you could use a balance transfer and only pay $30 or $50 in the transfer fee.
Then you have a certain amount of time to pay off the balance at a lower interest rate.
Of course, you need to be disciplined for this to work out in the end.
Otherwise you could end up in a lot of debt.
#4. Faster Debt Pay Off
Another benefit you will find is you can pay off your debt faster with a transfer offer.
This is because you will be paying less interest and as a result, more of your monthly payments will be going towards your principal.
Depending on how much debt you have, this could have a huge impact.
The sooner you get out of debt, the sooner you can begin to start saving money and building wealth.
#5. Opportunity To Make Money
Did you know you can use balance transfers to make money?
Many refer to this opportunity as credit card arbitrage.
Here is a great example of how this worked a few years back.
Back in the early 2000’s, interest on high-yield savings accounts were averaging 5%.
Since the economy was booming, credit card companies were offering 0% balance transfers and if you had good credit, many times they waived the fee.
So smart consumers were taking the convenience checks that came with their statements and depositing them into their online savings accounts.
- Read now: Learn the best ways to make money with credit cards
- Read now: Discover the pros and cons to online banking
Every month when their credit card statement came, they would use the money in the savings account pay the minimum.
They did this every month until the transfer promotion was ending.
Then they would withdraw the money and pay off their credit card.
The result is they made 5% on the money.
It was completely free money.
They kept repeating this process until the math didn’t work.
While you can’t do this in today’s interest rate environment, it is something to keep in mind.
Of course, you do need to make sure you can repay the debt before the promotional period ends, but there is no reason why you couldn’t use the offer for this purpose.
To find the best balance transfer cards to help you pay off debt, click the link below.
5 Cons Of Balance Transfers
There are numerous drawbacks to balance transfers.
Here are the 5 biggest you need to understand.
#1. Balance Transfer Fees Add Up
Every time you complete a balance transfer, you pay a small fee for doing so.
In many cases, the balance transfer fee is between 3-5% of the amount you transfer.
On the surface, this doesn’t sound like a big deal.
However, if you are consistently using balance transfers between cards to save on interest, the fees add up.
For example, let’s say you have $10,000 in credit card debt.
You complete a transfer and are charged 5%.
You pay the minimum payments each month for 12 months and then transfer the remaining balance to your other card, incurring another 5% transfer fee.
After 5 years of doing this, you reduced the amount you owe to roughly $5,800 and you paid a total of $2,100 in balance transfer fees.
Add in any interest charges, and the possibility of saving money goes out the window.
The point is, if you decide to do a balance transfer, make sure you pay off the amount as quickly as possible to ensure you are saving money in the long run.
#2. Could End Up In More Debt
This is the biggest downside to balance transfers.
If you don’t have control of your spending, taking advantage of balance transfers could see you end up in more debt.
I know because it happened to me.
I had accumulated some credit card debt and decided I needed to get my finances in order.
I was paying 17% interest on my debt and received a balance transfer offer of 0% for 18 months and I jumped on it.
The problem was, I never stopped spending.
I simply made new purchases on my old card that I just transferred my balance from.
I even opened a new credit card to get another transfer promo.
Sadly I ended up spending on that new card too!
Fast forward a year and I was in even more debt.
If you decide to do a balance transfer, you need to make sure you have your spending in control first.
- Read now: Learn how to break the debt cycle
Otherwise, you can end up in a much worse financial situation.
#3. Temporary Low Interest Rate
As great a deal as it is to get a lower interest rate on your credit card debt, understand that the low interest rate is only temporary.
After the introductory rate ends, you are going to be paying the standard purchase interest rate on your debt.
And with some cards, you might pay an even higher interest rate.
This is why it is critical you only transfer an amount you can comfortably pay off the full balance during the promotional period.
When you do this, you can save money and pay off debt at the same time.
At the end of the day, you need to read the fine print in the terms and conditions of the transfer to make sure you understand how the interest rate is applied.
#4. Promotional APR Goes Away If Payment Is Missed
One key feature that many people overlook is the promotional interest rate goes away if you miss a payment or are late on a payment.
Plus you will have to pay any late fees.
So if you make a transfer and you are late on the payment for month two, your remaining balance reverts back to a higher interest rate.
Therefore, it is critical you make sure you pay your credit card bill on time.
You might even want to consider signing up for bill pay.
This way you can ensure you are never late on a payment.
#5. Understand How Payments Are Applied
In the past, when you did a balance transfer to a credit card that already had a balance on it and made a payment, the credit card company would usually apply your payment first to your balance transfer amount.
This was done to increase the amount of interest the credit card company was earning.
But with the Credit Card Accountability, Responsibility And Disclosure Act of 2009, this has changed.
Now companies have to apply your payment first to high interest balances before low interest balances.
The problem here is if you don’t pay enough each month, you could end up still having a transferred balance remaining when your promotional APR ends, causing you to pay more in interest charges.
The best solution is to complete a transfer to a card that does not have a balance on it.
This will simplify the repayment process for you.
If you need to find a card that offers balance transfers, click the link below.
The good news is when used correctly, balance transfers can be a way to help you dig out of debt and save money.
But they are not a perfect solution.
You need to understand all the pros and cons of balance transfers and how they work so you don’t end up in more debt and pay more money in interest.
- Read now: Click here to learn the pros and cons of debit cards
- Read now: Find out how to use credit cards wisely
- Read now: Here are the credit card terms you need to know
I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
Visit my About Me page to learn more about me and why I am your trusted personal finance expert.