Pros and Cons of Using a Balance Transfer Credit Card

With 49% of Americans carrying a credit card balance, a balance transfer credit card can offer a break from high interest charges. That’s welcome news in a high-interest-rate environment where the average credit card APR hovers over 20% -- but balance transfer offers do come with risks.

You often need good to excellent credit to qualify for the best balance transfer cards. And the cards with the longest 0% introductory APR periods often come with an upfront balance transfer fee.  Additionally, if you don’t change your spending habits, a balance transfer won’t make your debt go away -- it will only move it around.

Knowing the advantages and disadvantages of balance transfer credit cards can help you make an informed decision on the best way to tackle your credit card debt.

Pros and cons of using a balance transfer

Some of the pros and cons of balance transfers are simple, whereas others depend on how you use them. 

Breaking down the advantages

Using a credit card balance transfer can benefit you in the following ways.

Save money by avoiding interest charges

With an introductory 0% APR, you’ll pay $0 in credit card interest until the introductory period on the card ends. Depending on how much debt you have, this benefit could lead to hundreds or thousands of dollars in savings over time. 

The key to success is credit card discipline. That means keeping up with monthly payments to get the debt to zero by the time the promotional period ends, and not using your credit cards until you’re debt-free.

Potential to pay down debt faster

With a break in interest charges, you can add the money you would have spent in interest to your principal balance. This can help you pay down debt considerably faster than you would if you still had to pay interest.

Can help improve your credit score

Making on-time payments on a balance transfer credit card can improve your credit score, and so can paying off the old debts you consolidated. 

Paying down the total amount you owe can help lower your credit utilization ratio, which can also help boost your score. Your credit utilization ratio is your debt-to-credit ratio. Experts agree that keeping your utilization below 30% will yield the best results for your credit score.

Can consolidate your credit card bills into one monthly payment

If you use a balance transfer credit card to consolidate several different credit card payments and bills, you can go from making several payments each month down to just one. (Of course, that’s only if you’re not using any other credit cards while you work to pay down the debt.)

Breaking down the disadvantages

Several disadvantages also apply to balance transfers, although some of them depend on how you use your card and how seriously you take the debt repayment process.

Balance transfer fees may apply

Most balance transfer credit cards charge a balance transfer fee totaling 3% or 5% of the debt amount you transfer. However, this fee can be worthwhile when you factor in what you could save on interest charges. 

It’s a good idea to do the math first to see whether a balance transfer card’s fees are worth the cost, or whether another debt repayment strategy might work better.

May make it easier to rack up more debt

If you apply for a new balance transfer credit card to consolidate your debt, you might find yourself with credit cards with $0 balances. A clean slate on these cards can entice you to overspend. You’ll need the discipline to stay on track with your debt payoff goals, as making new purchases while you work to get rid of your debt will only exacerbate the issue.

Intro APR offers don’t last forever

These cards only offer 0% APR on balance transfers for a maximum of 21 months or billing cycles. Thus, any debt you don’t pay off during that timeline will start accruing at the card’s variable APR.

To figure out how much you’ll need to allocate toward the balance each month to pay it down before the promotional period ends, divide the card balance by the number of months in the introductory offer. Remember to include the balance transfer fee in the card’s balance.

The best offers require good to excellent credit

Many of the best cards have high credit score requirements, typically in the good to excellent range. That means you’ll need a FICO score of at least 670 or a VantageScore of at least 661 to qualify. There are balance transfer offers for fair credit, but they don’t come with competitive rates and terms.

If you don’t have great credit, there are still strategies you can use to get out of credit card debt. These include applying for a personal loan or utilizing a payoff plan such as the avalanche or debt snowball method.

How to use a balance transfer responsibly

How you use a balance transfer credit card is the most important factor in getting rid of your existing debt. The following steps can help you use one of these cards to your advantage:

• Choose your balance transfer credit card wisely. Make sure you pick a balance transfer credit card that gives you enough time to pay off your balance. Introductory 0% APR periods last anywhere from nine months to 21 months, with the best options charging a 3% balance transfer fee.
• Come up with a debt payoff plan. Figure out how much you need to pay each month to become debt free during your card’s intro APR period. For example, if you have $5,000 in debt with 21 months to pay it off and a 3% balance transfer fee, you would need to pay about $246 per month that entire time (5,000 + (5,000 x .03) / 21).
• Pay as much as you can each month at 0% APR. You should always try to pay the required minimum to get out of debt during your card’s intro APR offer. But if you can, allocate even more each month to ensure you get the balance to zero by the end of the promotional period. Paying more in some months can end the process even sooner, but it also means you can pay a little less some months if you need to.
• Stop using credit cards for new purchases. The most important move is to stop using credit cards for new spending. You can’t dig your way out of debt if you continue adding to it.

When should you use a balance transfer?

If you’re serious about paying off debt, a balance transfer could help. However, you’ll need to change your spending habits to get rid of your debt and to remain debt-free afterward.

Don’t use a balance transfer credit card if you’re still planning to use credit cards for purchases while merely shuffling debt around to make life easier. Unless you have a concrete plan to pay down debt, and the discipline to do so within your card’s intro APR period, it’s unlikely a balance transfer card will leave you better off.

How do balance transfers affect your credit score?

Applying for a new credit card nearly always results in a new hard inquiry on your credit reports, and this can ding your score for a few months. That said, transferring balances to a new card can also help your credit by providing access to another credit line. 

As your total lines of credit increase, your credit utilization rate should decrease. You can also provide a much-needed boost to your credit by making on-time payments on your card every month, while lowering your overall debt.