Are Balance Transfers a Good Idea?

Wait, there’s a question about this? A balance transfer lowers an interest rate and speeds up the getting-out-of-debt process and we wonder if that is a good idea? Well duh! The answer seems easy, doesn’t it? Clearly, it’s yes, right?

So why bother reading on?

Here’s why. Because there is a better, more specific question you should be asking – Is a balance transfer a good idea for me? — and that answer isn’t so easy.

Fact is, there are a number of ways to decrease the interest you’re paying on your credit cards and speed up the process of reducing your debt. Some of those ways might address your particular situation better than a balance transfer does. Under the wrong circumstances, a balance transfer can even do you more harm than good.

Before you make the move, be sure a balance transfer isn’t a square peg for the round hole of your debt. We’re going to dive deeper into the answer to that better question a little later. That’s why you should read on as we explore the wonderful world of balance transfers.

What Is a Credit Card Balance Transfer?

Here’s the thing: You don’t have to lug the albatross of a high-interest credit card balance around your neck for the rest of your days. If the interest you’re paying is anywhere close to or above the average rate – in 2024, that national average was a whopping 24.6% — you can do better.

One way is a balance transfer, in which a different credit card company pays off the balances on your old cards and moves them on to a new card that charges a lower interest rate, preferably 0%, if you qualify. Your credit card debt doesn’t go away, but you save money on the interest you pay. In theory, that should enable you to take bigger, faster chunks out of how much you owe.

You’ve no doubt seen and heard the pitches from credit card companies offering a low or even 0% Annual Percentage Rate (APR) over a certain amount of time, usually anywhere from 6-24 months. That’s the lure of a balance transfer.

There’s a catch or two or three, of course. (There’s always a catch, right?) One is that not everyone will qualify for a balance transfer. It isn’t automatic; the company that issues the card determines your eligibility. You’ll need a strong credit score, usually 700 or higher to get the 0% rate. In some cases you’ll need to provide proof of income. It’s possible to be approved for a balance transfer with bad credit, but the terms won’t be as favorable.

As we mentioned, the decision to transfer your balance sounds simple, but it won’t work for everyone. So, are balance transfers worth it? There are pros and cons to a balance transfer, and you should understand them before you try to unload your debt albatross onto a time-limited low-interest credit card.

The Pros of Balance Transfers

We’ll start with the good because the benefits really can make a positive difference when it’s time to downsize your credit card debt. Assuming your credit is good and that you’ll be able to handle the terms associated with the transfer fee (usually 3%-5% of the amount transferred), moving your balance to a lower-interest card can alleviate the burden of those monthly payments and accelerate the pace at which you shrink your debt.

Let’s look at some of the advantages.

Consolidate and Reduce Monthly Payments

Say you’ve been carrying balances on three or four (or perish the thought, more!) credit cards and making payments with different due dates on each of them every month after every month. When you transfer those balances to a single card, you only need to make one monthly payment. You’ve hit on a way to consolidate debt into one bill and one due date. Nice! And if you find the right balance transfer deal at the right interest rate, it’s possible your one new minimum monthly payment will be less than the sum of all those monthly credit card bills you’d been paying before.

Take Advantage of Low Interest Rates

You want to save money, right? It’s usually a sobering moment when you calculate what portion of your credit card payments are interest charges compared to how little those payments actually reduce the principal in your balances, including when you’re having trouble making the payments or only paying the minimum amount every month. A balance transfer allows you to eliminate some or all the interest you’ve been paying on your credit cards, at least during the new card’s promotional period. That leaves more money to go toward reducing the balance owed. Voila! You’ve cut a troublesome expense.

Pay Debt Down Faster

Because the card to which you transfer your balances comes with a lower interest rate, maybe even a 0% interest rate, you change the ratio between interest and principal in your monthly payments. With each payment after the transfer, you attack a more significant piece of the principal than you did pre-transfer, speeding up the business of reducing your credit card debt. You might even free up enough extra money to put toward other debts such as a mortgage or a car loan.

The Cons of Balance Transfers

Yes, a balance transfer should temporarily relieve you of some or all the interest charges on those king-sized credit card balances you’ve been carrying. But it’s worth keeping in mind that the credit card companies offering you a 0% APR to coax that debt away from your existing cards aren’t doing it solely out of the goodness of their hearts. There’s something in it for them, too. If you aren’t careful, that something can come at your expense.

So, as you consider transferring your balances to a lower-interest card, be aware of the possible problems, including the ones you might bring on yourself. We’ll itemize them next.

Consider Transfer Fees

In most cases, you can’t transfer your balance for free. The new card might come with 0% interest, but the company likely will extract something from you to get it – a one-time fee to complete the transaction. That fee usually is between 3%-5% of the balance or balances being moved. So, for example, if you’ve been carrying a credit card debt of $7,500 and want to transfer it to a new 0% APR card, it could cost you anywhere from $225-$375 in a transfer fee. You should factor that in to how much you think a balance transfer will save you.

Low Interest Rate Won’t Last

The siren song of a balance transfer is that low or 0% APR. But beware of the rocks looming beyond the horizon of the new card’s low-interest promotional period. Once it ends, the interest rate on your balance will skyrocket back up to 20% or higher. (Like the transfer fee, this is one of those here’s-what’s-in-it-for-the-credit-card-company factors.) Will that crash the budget you put together before you decided to transfer the balance? (You did budget first, didn’t you?)

Need a Good Credit Score to Be Accepted

The magic minimum credit score for a 0% card, as we mentioned earlier, typically is 700. You can take a lower credit score into a balance transfer transaction, but you won’t be offered the sweet savings terms likely to make the move worth your while. Plus, every time you apply for a new credit card, the credit agencies at least temporarily knock some points off your score whether you’re trying to transfer a balance or not. If you don’t think your current credit score is strong enough, why risk making it even worse with an application that probably won’t be accepted?

Could Add to Your Debt, If Not Planned Accordingly

This con is on you rather than the card company or the credit bureaus. If you manage your new transfer balance irresponsibly, you’ll find yourself worse off than you were, faster than you can say “Rumpelstiltskin.” Missing the chance to pay down the balance during the promotional period will cost you some pretty pennies when the low-interest time is up. And if you continue to spend recklessly and add even more debt on the new card … well, look in the mirror to see who’s to blame.

Will a Balance Transfer Affect Your Credit Score?

Bad news and good news here. First, the bad news.

We’ve already told you that the credit bureaus deduct a handful of points from your credit score every time you apply for a credit card, including a balance transfer card. In part, that’s because a new application automatically requires something called a “hard inquiry” into your credit file, which allows a creditor to assess your risk as a borrower. Every hard inquiry shows up on your report; when it does, it looks to lenders as if you’re taking on new debt. Hence, the temporary loss of a few points on your credit score.

If you close out your old credit card account or accounts after you transfer your balance, two other factors can figure temporarily into the loss of points on your credit score. One is that you’ve lowered your total available credit, which can affect the percentage of how much of your credit you’re using. That’s your credit utilization ratio, and it counts for 30% of your credit score.

The other issue with closing out your old cards is that it shortens the length of your current credit history, which makes up another 15% of your credit score. The point: The longer you’ve had credit cards, the better it is for your score. It’s smarter, then, to keep the old card accounts open without using them much, if at all.

Now the better news.

If you manage your balance transfer card correctly – meaning you don’t run up the balance you’ve transferred by making numerous new purchases, and you keep current on the monthly payments – you’ll be improving your credit score in the long term. Why? Because you’ve used your new card for the right reason: to pay down your debt. You’ve reduced how much you owe while you’ve increased your overall available credit (assuming you keep the old cards active). That will keep your credit utilization ratio below the 30% level, and the credit bureaus will reward you with a better score. Plus, you’ve further established your bona fides at paying your bills on time, another rewardable element in your favor.

Are Balance Transfers a Good Idea for You?

Here we are. We’ve arrived at the better question. And the answer is … used properly, balance transfers are definitely a good idea. Used carelessly, they become another troublesome financial problem. It’s up to you. You no doubt were hoping for something more definitive than that, but the truth is that there is no one-size-fits-all answer because everyone’s debt is different and nobody’s relationship with money is exactly like yours.

At least by now, you know the pros and cons of a balance transfer, and you can use that knowledge to make a long, hard assessment of your ability to capitalize on the low-interest opportunity the new card offers. Are you confident you can stay on top of the monthly payments and make a significant dent in your credit card debt during the length of the promotional period?

If your answer is yes, then you’re a good candidate. A balance transfer card is a good idea for you.

But a big part of your decision should be a wide-eyed look into the level of your commitment to reduce your debt. The hardest part of that commitment likely will be the willpower it takes to resist using the new card too often. The balance you’ve transferred won’t shrink if you flash your new plastic at every restaurant, concert, boutique, video game, and travel agency you encounter, or if you punch in its account number to autopay every one of your other monthly bills. That kind of behavior – your lack of willpower – is what’s in it for the credit card company offering you a short-term, 0% APR balance transfer.

One more little factor to keep in mind if a credit card’s rewards program is important to you. You won’t earn cash back, airline miles or points from the actual transfer of your balance to a new card. But a balance transfer card often offers those perks when you use it for new qualifying purchases. That can be nice, but it can also be another test of your willpower in the effort to reduce your debt.

If you aren’t sure you’re ready yet to take on the responsibility of managing a balance transfer properly, this probably isn’t the time to do it. But there are other ways to handle your credit card balances and attack your debt, as we mentioned up top. We’ll outline them in the next section. Maybe you’ll find a more suitable remedy there for your financial predicament.

Balance Transfer Alternatives

Is it safe to assume you’ve read this far because your credit card debt is a problem and you’re looking for the best solution? If it is, then congratulations! You’re doing your due diligence, as you should, on the debt-relief options available to people who might be in over their heads. A balance transfer card is only one of those remedies, and it might not be the right fix for you.

Before you decide on a course of action, consider these other approaches to your debt dilemma:

• Credit Counseling: A free session with a certified credit counselor from a nonprofit credit counseling agency perhaps should be your first move. You’ll get a detailed overview of the alternatives most relevant to your financial situation. Credit counseling will help you develop a personalized plan to attack your debt.
• Debt Management Plan: As with a balance transfer, a debt management plan lowers the interest on your credit card debt to 6%, sometime less, and brings your monthly payments down to a more affordable level. But unlike the six-months-to-two-years period of low or 0% interest with a balance transfer promotion, the goal of a debt management plan is to get your debt paid off in 3-5 years. These plans are offered by nonprofit credit counseling agencies that have agreements with the card companies to help their customers in debt trouble.
• Credit Card Forgiveness: Credit card forgiveness is an agreement with your card company to pay 50%-60% of the debt owed in 36 fixed payments. There is no negotiating involved. If you miss any of the 36 payments, this program is canceled. There are qualifying standards, the most prominent one being that you haven’t made a payment on your credit card bill in 120-180 days. This program is offered by a limited number of nonprofit credit counseling agencies and accepted by a limited number of creditors. Your credit score will take a hit because you didn’t pay the full amount owed, but if you make on-time payments, it will recover in a year or two.
• Debt Settlement: This is a way to pay less than what you owe on a debt. You do it by making payments into an escrow account while a third-party, for-profit company negotiates a settlement agreement with your credit card company or, if things have reached this point, a collection agency. A successful debt settlement can remove around 50% of what you owe, but it can take 2-3 years to complete and it will negatively impact your credit score far more than a balance transfer does. This negative mark stays on your credit report for seven years.