Unfortunately, balance transfers have a bit of (an unwarranted) bad rep in the personal finance blogging community. Usually, it’s because people are afraid that they’ll be used for the wrong reasons, such as transferring debt around so people end up racking up even more credit card debt.
But, just like credit cards as a whole, balance transfers can be a really helpful financial tool if they are used in the right way.
Here’s what you need to know about how to use a balance transfer to help pay off debt quickly.
What is a Balance Transfer?
Simply put, a balance transfer is when you move your credit card balance from one card to another card.
Although doing a balance transfer won’t lower the amount of debt you have since you’re just moving it from one creditor to another, it can still help you pay off your credit card debt faster. I’ll get into that a bit more below.
How Do Balance Transfers Work?
Balance transfers can be done using credit cards you already have. You don’t necessarily have to apply for a new credit card in order to do a balance transfer. However, many people who do balance transfers to help them pay off their debt faster will do it by applying for a new credit card that offers a low promotional interest rate on balance transfers.
If you have good credit, you may get promotional balance transfer offers on your current credit cards too, which could save you from opening a new account just to do a balance transfer.
You can initiate a balance transfer in a couple of different ways.
First, you may be able to do the whole thing online. This is how I did my balance transfer when I was paying off my credit card debt a couple of years ago.
The other option is to call your creditors to initiate the balance transfer over the phone.
Either way, you will need to have the account number for the card you want to transfer the balance from, as well as the amount you want to transfer. You may or may not be able to transfer your entire balance from one card to another.
The amount you can transfer depends on your credit limit and available credit on the card you are transferring the debt to. Plus, some creditors have dollar limits for transfers that may be lower than your credit limit or available credit.
After you initiate the transfer, don’t stop making payments on your old account until the transfer is completed. It may take a few days, or even a couple of weeks, to be completed.
What are the Benefits of Balance Transfers?
Balance transfers can offer several benefits. Here are few to consider.
Lower Interest Rates
One of the best benefits you can get by doing a balance transfer is a lower interest rate on your debt. If your current card has a high interest rate, look for one with a lower rate that accepts balance transfers.
For example, PenFed Power Cash Rewards Visa Signature® Card offers a 0% promo APR on balance transfers for 12 months with a low 3% balance transfer fee. Plus, there’s no annual fee.
Credit unions also tend to have the lowest APRs on credit cards, so if you for some reason can’t pay off the whole balance transfer before the introductory 0% APR expires, at least you won’t be paying interest out the wazoo. (Yes, that’s a technical term.) 😉
Lowering your credit card interest rate may help you pay off your credit card debt faster since more of your money will go toward paying off the principle instead of paying for interest charges. This ultimately saves you money because you’ll be paying less interest.
Consolidating Credit Card Debt
If you transfer several credit card balances all onto one new card with balance transfer you will have fewer payments to make each month. This means you’ll have fewer due dates to keep track of and you can make one (probably larger) payment each month to your consolidated balance instead of making several (probably smaller) payments to several cards.
Keep in mind that you will need to have a high enough credit limit on the card to transfer several balances.
What are the Drawbacks of Balance Transfers?
Of course, with any decision you make in life, there are also some potential drawbacks that need to be considered. Here are some of the drawbacks of balance transfers.
Your Interest Rate Could Be Higher
Unfortunately, not everyone can qualify for promotional interest rates. This could be the case if you have bad credit or carry a lot of debt. If you don’t qualify for promotional interest rates on cards that offer balance transfers, it may not be beneficial to do a balance transfer since the potential savings are not as high and they may be lowered even further due to balance transfer fees.
Balance Transfer Fees
Balance transfer fees may be waived on some offers, but others may charge a fee that is usually between 1% and 3% of the balance you are transferring. For example, a balance transfer fee of 3% on a transfer of $1,000 is $30.
Before you do a balance transfer, make sure to account for these fees and the interest rate of the new card when calculating how much money you can save compared to the interest charges on your current card.
Lowering Your Credit Score
If you open a new credit card to do a balance transfer, it may lower your credit score because every time your credit report is pulled for a new account, your score will likely decrease by a few points over the short-term.
But even if you use a card you already have, your score may also lower if your balance raises above 30% of your credit limit when you do a balance transfer.
Again, these decreases may only be temporary if you make on-time payments and work to lower your balance to below 30% of your credit limit.
Temptation to Rack Up More Debt
As I mentioned in the beginning, the biggest risk that you may face if you do a balance transfer is the temptation to rack up more debt.
Unfortunately, some people get a balance transfer with the best intentions of lowering their interest rate and paying off debt. But if emergencies or temptations arise, they may end up with more debt than they started with before the balance transfer.
In order to get the most out of your balance transfer, you have to be very disciplined to not back further into debt by making purchases on your old card. If you don’t have the self-discipline (or an emergency fund for when unexpected expenses arise) to do this, you might want to consider closing your initial credit card to help remove that temptation.
Keep in mind that if you do choose to close your initial credit card, it could cause your credit score to be lowered.
Should You Use a Balance Transfer?
After weighing the pros and cons of balance transfers, including considering how a balance transfer could affect your finances over the long-term, if it will ultimately save you money or help you pay off your credit card debt faster, then I believe a balance transfer is worth it!
Have you ever done a balance transfer? Why or why not?
This post is in collaboration with PenFed Credit Union. The views expressed in the article are the views of the author and do not necessarily reflect the views of Pentagon Federal Credit Union. PenFed Credit Union is an Equal Housing Lender and is federally insured by the NCUA.