The Pros and Cons of Balance Transfers
If you owe money on a credit card, there are a number of ways to pay off that debt. One way to pay off your credit card debt is with a balance transfer. A balance transfer is the practice of transferring debt from one card to another. There are many pros and cons to this practice.
Balance Transfer Pros
The first and most apparent benefit of transferring your balance from one card to another is a reduction in interest rates. Many credit cards offer balance transfers at a zero percent interest rate. If youíre paying twenty percent or more on a card, transferring it to a card with zero percent interest can save you a lot of money.
Another benefit of balance transfers is that youíre sticking with unsecured debt. Youíre not putting anything, like your home, up as collateral on a debt.
Ideally, when you transfer your balance, in addition to an interest-free period, youíll also be moving your debt to a lower overall interest rate. For example, if you move your debt from a card with a twenty percent interest rate to a card with a three month zero percent interest rate and a ten percent interest rate after three months, youíre making a potentially wise decision.
Balance Transfer Cons
The biggest con to a balance transfer is the fact that it can affect your credit score. You may be essentially maxing out one card. This affects your score.
Additionally, you may be penalized by the credit card with the now zero balance. They may reduce your credit limit. This has the effect of reducing your debt-to-credit ratio, which also lowers your score.
For example, if you have two cards, both with a seven thousand dollar credit limit, you have fourteen thousand in credit. If you have five thousand on one card and you transfer that balance to a second card with three thousand on it, you still owe the same amount of money. However, the card with the now zero balance may reduce your credit limit to five thousand dollars. Now you only have twelve thousand in credit but you still owe eight thousand. The higher your debt to credit ratio, the lower your credit score.
Youíll also likely pay a balance transfer fee. This fee can negate the benefits of the balance transfer. This is particularly true if the zero percent interest rate period is quite short.
Finally, you can transfer a balance and then run up the debt on that card. This leaves you with two hefty credit card payments.
Before you commit to a balance transfer, take a look at the fees. Investigate what your credit score is and if you can afford to risk it. Also, take a look at how long the zero percent interest rate lasts. Balance transfers can make sense but theyíre not always a smart choice.