Considering the Pros and Cons of Balance Transfers

When you have a credit card and find yourself paying off more in interest than principle it may be time to think about the pros and cons of balance transfers. Think of this, if you have a high APR, high being somewhere around 18% or above you are probably paying only the interest on purchases you made years ago.

Considering the Pros and Cons of Balance Transfers

If you take the time to look at the amount of money you are paying over and above the amount you would have paid in cash for the item in the first place you may be shocked at how many things you would have been able to afford with that extra income. So why not just jump in and move the balance? Who wouldn’t love to find extra money in their pocket? The terms and conditions of moving debt from one credit card to another can be confusing.

To help you make an informed decision and keep you from being blinded by a low APR hiding outrageous fees, here are some pros and cons of balance transfers to act as a guide.

The Pros

  • There is a possibility of getting a lower interest rate allowing you to pay more of the principle and reduce your debt sooner.
  • Time is on your side. While credit card companies were not offering reduced rates or low fee cards a few years ago when the economy was suffering those tides have turned and competition for business is working in your favor.
  • Check the fine print, you may find there are no fees for the first year of your new card.
  • By shopping around you can transfer the balance of your high fee card to a new card with lower fees and a longer grace period.
  • If you find a new card with a high credit limit you can move the balance from multiple cards to a single one decreasing the number of payments per month. 
  • You can use this to create a clean slate and learn how to manage your finances more effectively. 
  • There are websites out there like CardHub.com  and LowCards.com that can help you sort through the many offers available to find the one that is the best fit for you. 
  • You can calculate your savings using websites such as SmartBalanceTransfers.com that will take your current APR, balance due and current fees into consideration and match them against the card you are looking into then estimate the amount of money you would save with the transfer.
  • Balance transfers normally carry a higher interest rate than purchases, if you have a less than stellar credit score you could be increasing your interest.

The Cons

  • You may not qualify for a good card if you have damaged your credit score. A credit score above 720 will help when shopping for cards. The Discover “It” Card which has fantastic balance transfer terms approves people with an average credit score of 731.
  • Transfers cost you money, the fee for a balance transfer is usually a percentage of the balance, roughly 3 or 4 percent.  It is possible to find a card that charges a flat rate for transfers sometimes as low as $100,  which is preferable when you are moving a high balance.
  • You may also have an annual fee with your new card that was not a part of your last contract.
  • One of the most important things to consider when you consider the pros and cons of balance transfers is your credit score. If the balance you are transferring is more than 30% of the limit of the new card you will decrease your credit score.
  • It is possible your new purchases will draw a higher rate of interest than your balance that you transferred. This could be worse than your original deal because you may not be paying for the new purchases until the old balance is paid in full. This will mean that you are accruing the higher interest over a longer period of time.
  • If you can’t handle the payment schedule you could end up in a worse situation than you had before. A late payment could negate your zero percent interest on balance transfers resulting in higher interest than the card or cards you transferred from meaning you will take longer to pay down the principle. This is a double disaster if the new purchases will not begin to get paid until the balance transfer is gone.

The verdict:

After weighing the pros and cons of balance transfers it is worth doing if you do your homework, choose the right card with a lower APR, a high enough credit limit that you don’t take a hit to your credit score and read the fine print to ensure you are not paying additional fees. As long as you can pay on time transferring your balance is a wise financial move.