A balance transfer is when you move credit card debt from a high-interest card to a zero-interest card to save money. Sounds simple enough, and if you’re looking for ways to pay off high-interest credit card debt much faster, there’s hardly a better tool for that purpose.
Even still, there are a few things you should know about balance transfers before you initiate one. It’s mostly good news, and there are a few big advantages that most folks don’t even consider.
On the flip side, there’s a handful of drawbacks to consider ranging from high fees to outstanding “problems” that your balance transfer won’t address.
So without further ado, let’s explore the pros and cons of balance transfers.
Pros of balance transfers
Broadly speaking, balance transfers offer far more pros than cons. From saving gobs on interest to saving your credit score, here are some of the highlights.
You could save hundreds (or thousands) on interest
Let’s say you have a credit card with a balance of $7,600, which was roughly the average balance for a cardholder aged 40 to 49 in Q2 2023. The APR on the card is pretty high, too, at 27.49%.
If you make $500 monthly payments, you’ll pay off your card in 19 months - but it’ll cost you $1,848.79 in interest along the way, or nearly $100 extra per month.
By contrast, if you transfer your $7,600 balance first, you’ll pay off your debt three months faster - and pay $0 in interest.
You can pay off your credit card debt much faster
Balance transfers also empower you to zero out your balance much faster since the interest will no longer be working against you.
By applying 100% of your monthly payment towards your principal, your debt will shrink at a rate that many find powerfully motivating, pushing them to further increase their monthly payments until their debt is gone.
Balance transfers can help consolidate your debt
Debt consolidation is when you take out one loan to pay off several others. This lowers the number of outstanding loans you have to track - reducing the likelihood that you’ll miss a payment - and may also lower the total interest you pay in the end.
Along with personal loans and home equity loans, balance transfers are considered a quintessential debt consolidation tool since they can absorb debt from multiple high-interest cards, giving you fewer accounts to track and less interest to pay.
They can improve your credit score by lowering your utilization ratio
Even if you haven’t missed a minimum monthly payment, your credit card debt may still be hurting your credit due to its impact on your credit utilization ratio.
Your credit utilization ratio, quite simply, is what percentage of your available credit you’re using up. So if you have a $7,600 balance on a card with a limit of $10,000, your credit utilization ratio on that account is 76%. And according to Experian - one of the major bureaus that tracks your credit score - “30% is the point at which it starts to have a more pronounced negative effect on your credit score.”
Unless your new card has a higher limit than your old one, a balance transfer won’t lower your credit utilization ratio overnight. It will, however, allow you to lower it much faster as you pay off your debt at 0% interest.
You might even earn a cash signup bonus - but be careful
Like other rewards cards, some balance transfer cards offer a cash signup bonus if you spend enough within the first few months of account opening. The Citi Double Cash card, for example, offers 0% APR on balance transfers for 18 months and a $200 cash bonus if you spend $1,500 within six months.
But depending on your perspective, a balance transfer card offering a spending bonus is like a personal trainer treating you to Five Guys. It’s generous and appreciated, but possibly counterproductive to your goals.
If you’re truly looking to get out of debt ASAP, you might consider a balance transfer card that offers 0% APR on balance transfers and purchases.
The mental health benefits are powerful, too
Last but certainly not least, balance transfers can be big stress-relievers. I have a dear friend who grappled with high-interest credit card debt for years before she discovered balance transfers, and once she saw her spiraling interest payments disappear, she felt freshly motivated to get out of debt.
As showcased by America’s rising financial stress, debt doesn’t just affect your wallet and credit score but your overall health as well. So any tool that can alleviate both the financial and mental burden deserves to be shared far and wide.
