What is a balance transfer Credit card?

Balance transfer credit cards are used to move your outstanding debt from one card onto a new one, typically with lower interest rates. They are useful if you need more time to pay off a big purchase and want to avoid interest rate payments. When used effectively they can be a great financial tool, but learning how to manage them correctly is vital or you may end up in a worse situation.

 

The Pros and Cons of a balance transfer credit card

 

The Pros

  • Save money on interest

This is the biggest benefit of a balance transfer Credit card and they typically come with a low or 0% interest promotional period so you can transfer your amounts at a much lower rate.

  • You can give yourself more time to pay off your debt

You can move from multiple accounts and multiple due dates to a single payment, often with a lower interest rate. This can give you time to save money so you can pay off your debt and technically still be on time and avoid big late payments.

  • Pay off debt quickly

Paying less interest on credit card debt can allow you to pay down the principal more quickly so you can get out of debt sooner. When your amount is not building up you can be sure you can come up with the funds and not increase your debt, when used correctly.

 

The Cons

  • Balance Transfer fee

There is typically a balance transfer fee of 3-5% of the amount transferred. There is usually a minimum amount for the fee and your account will give you the lowest % when you are a new holder for a set period of time before the transfer fee can increase.

  • Potential for more debt

When using these cards, you will have to be disciplined and follow your financial plan. Otherwise, you could lead yourself into more debt by continuing to use your cards that were paid off in the transfer. Don’t be tempted and stay on track to avoid this.

  • Low interest is usually temporary

Your account won’t give you a low interest rate forever and if you do not pay off the balance transfer by the end of the promotional period, your APR will shift to a higher rate. The promotional period on balance transfer cards typically ranges from 12 to 21 months.

Credit Limits

Your new balance transfer credit card may not offer you a high enough limit for your high-interest debt you want to move. The amount of credit offered is based on a variety of factors and could differ between issuers. You may need more than on transfer card or only transfer a portion of your debt.