Sometimes balance transfers can seem too good to be true. You get a blank check in the mail, or receive a promotion with your statement, saying you can pay down debt faster, without paying any interest.
But like with all financial products and services, you have to be wary and understand all the pros and cons before testing them out. Once you’ve determined the best method for your situation, you can honestly ask yourself, “can balance transfers be a good tool to help pay off debt?”
The Benefits of Using Balance Transfers
There are quite a few pros to leveraging credit card balance transfers to save you time and money while paying down debt. For instance;
Lower Interest Rates. If you have good credit, you can save a lot of money in interest charges and other fees when you do a balance transfer. Many times the credit card company will offer a special that even allows you to pay 0% interest for a year or more. Imagine how much money that saves you, compared to the standard 20% interest most credit cards charge!
Faster Debt Payment. By taking advantage of the lower interest rate, you’ll be able to pay down your debt at a much faster pace. Even if you don’t get a 0% rate, anything lower than what you’re currently paying will allow more of your payments to go toward the principal balance.
More Cash Flow. Since balance transfers often come with a 12 – 18 month payback timeline, you can map out your debt payment plan accordingly. For example, if you owe $1,800 but the credit card company gives you 12 months to pay it back with a 0% rate, that means you need to pay $150 a month before they tack on interest charges. Depending on your current debt repayment, this amount could be less than what you’re paying now, so you get more money in your budget to pay debts, or other expenses.
Alternatives to Higher Interest Rate Loans. Nothing is worse than owing your friend money, or taking out a personal loan with a family member. It’s something that’s constantly hanging over you, reminding you that you’re in debt to the people you love. Balance transfers can make a good alternative to other costly higher interest rates loans, such as personal loans, home equity loans (HELOC’s), lines of credit and other high interest rate loans.
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The Pitfalls of Using Balance Transfers
Like with all things in life, there’s always a downside to consider, and it’s important to understand and know the potential pitfalls of using balance transfer credit cards.
Even though it has some advantages, like saving you money on interest and can make your balance go down quicker, there are some disadvantages you need to know too.
Balance Transfer Fees. All credit card balance transfers come with a balance transfer fee, often around 3 – 5% of the overall transaction amount. This could end up being quite a big fee if you have a large amount of debt to transfer. Beware of the fee versus the amount of your interest rate savings, and calculate if it’s worth it. In some cases it might be, while other times it’s not.
Short Grace Periods. Although 12 – 18 months may seem like enough time to repay your debt, the deadline comes faster than you’d expect. Be sure you don’t miss any payments — or make up for the ones you miss — so you don’t get slapped with all the interest that’s accrued so far. Because once the grace period is up, the introductory interest rate will be gone and a much higher one will take effect.
False Sense of Freedom. When you combine multiple cards or transfer debts using the balance transfer method, you’ll get a boost on your debt payment plan. It can feel like you’re making progress — by lowering your interest, cutting off debt repayment time, and saving money. But beware of this false sense of freedom, and keep your eye on the balances, which is what determines if you’re still in debt or not.
End up in More Debt. Opening a new credit card to transfer your balance can be tricky, and you could end up with more debt than when you started. Even if you use a credit card you currently have, it’s still dangerous to see such a high credit limit available to you. Vow to only use the card for balance transfers, and never use it for additional purchases.
Beware of Balance Transfers
Using balance transfers can help you pay down debt faster, if you understand all the pros and cons upfront, and prepare yourself to handle them wisely. They can no doubt be used to your advantage, you just have to make sure the credit card companies don’t win the battle!
Image Credit: Chris Potter