Pros and Cons of Credit Card Balance Transfers

Are you drowning in credit card debt? If so, a 0% balance transfer may seem like a great way to work toward fixing that problem. Before you take the plunge, however, it’s worth looking at the pros and cons of balance transfer offers, along with a few mistakes you should definitely avoid.

Pro: Saving Money

Perhaps the biggest upside to transferring your existing, interest accruing, credit card debt onto a new account with an attractive balance transfer offer is the fact that doing so can save you a ton of money.

If your credit is in good shape, you may be able to qualify for a temporary 0% interest rate on a new card, often for as long as 12-18 months. If you work aggressively toward paying down your debt before that introductory interest rate expires, the savings can indeed be significant. You’ve won!

Con: Balance Transfer Fees

When you take advantage of a low or 0% interest rate offer on a balance transfer, your new card issuer may charge you what is known as a balance transfer fee. Balance transfer fees vary, but they are often 3%-5% of the balance you transfer. This means that if you transfer $10,000 in credit card debt, you may be charged $300 to $500 for the privilege of doing so.

Sometimes you can find a balance transfer offer which does not tack on balance transfer fees, but you may need to shop around to find one. No matter what, be sure to read the fine print before you apply for any new account. You should make sure that a balance transfer still makes good financial sense if any additional fees are involved. In most cases, those fees are still not enough to flip the math and make the new card a bad deal.

Pro: Credit Score Improvement

Balance transfers do not automatically improve credit scores, but they have the potential to do so. Credit scoring models, like FICO and VantageScore, consider the percentage of your available credit limits which you are utilizing as a balance and factor that calculation into your credit scores. The lower your utilization ratio, the better for your scores. And, that’s true for all credit scoring systems.

When you open a new account and transfer all of your outstanding credit card balances onto it, you will probably reduce your overall revolving utilization ratio due to your new, higher overall aggregate credit limit. That can be a good move for your credit scores. Also, by reducing the number of accounts with balances on your credit reports, your scores might benefit again. Again, you’ve won!

Con: Credit Score Damage

While the occasional balance transfer may help your credit scores, abusing the system can backfire badly. You cannot roll from one balance transfer into another and another and expect this behavior to not catch up with you. Repeatedly applying for new credit card accounts can harm your scores in a number of ways.

First, the credit checks or “hard inquiries” themselves could cause minor credit score damage. Second, opening new accounts too frequently will lower your average age of credit, which is another negative move in the credit score department.

Manage Your Balance Transfer Wisely

A balance transfer can absolutely be an effective part of your credit card debt elimination strategy. However, if you do not manage your balance transfer wisely, the decision could come back to haunt you in the future.

The only way for a balance transfer to truly save you money is if you make a commitment to break the overspending habit which got you into this situation to begin with. Otherwise, you could overutilize your newly paid off credit card accounts for a second time, causing more severe credit score damage and placing yourself in a very dangerous financial pickle.