Balance transfers can be a really good option for particular consumers in very specific situations. For example, a balance transfer can save money for someone making a specific purchase that might be larger than usual. If someone has to buy something and might not have the cash for it, and is planning to pay it off in a set amount of time, a balance transfer can be a handy tool.
We spoke with Lisa Frankenberger, credit counselor at Consumer Credit Counseling Service of Buffalo, New York about balance transfers, and whether they’re a good idea.
“I would say it depends on the person’s situation, probably just like anything else in life,” says Frankenberger. “There’s pros and cons.”
Balance Transfers Can Get Consumers Into Trouble
“I think a lot of people get into the balance transfer game where they just sort of start shuffling things around,” says Frankenberger. “They try to create a situation where they can pay their debt at the lowest interest rate possible at any given time. Some people will be looking every six to twelve months to take advantage of the next best offer that comes in the mail or that they see online to transfer their existing debt to a new card.”
Balance Transfers Can Create More Debt
Playing the balance transfer game can work, and it can save you money. But for people carrying a larger debt burden who find they’re struggling to pay it down, balance transfers might not be the way to go.
“You’ve got to pay attention to the fact that you may just be moving it around,” says Frankenberger. “If you’re not in a position where you can pay extra above the minimum payment to make progress on it, in the long run you might be hurting yourself by continually opening new accounts and not really reducing your debt.”
In other words, balance transfers can sometimes end up hurting consumers, especially if they wind up with a lot of new credit accounts and they start to use that available credit for purchases. Sometimes people who do balance transfers just end up getting in more debt.
For instance, imagine you have $2,000 in debt and you’re paying 16% interest on it. Then you get an offer in the mail that has 0% interest for six months. You can transfer that debt to the new card with the lower rate and make more progress on it. But where things go wrong is that your minimum payment is calculated based on your interest rate. The lower the interest rate, the lower the minimum payment. So if you do a balance transfer and your minimum payment’s only $30 or $40, unless you pay more than that, you’re really not paying down a significant portion of your debt.
Balance Transfers Usually Carry a Small Interest Charge
A 2% to 3% interest charge is pretty typical for a balance transfer fee, even on cards that offer 0% interest. That fee is a percentage on the amount of debt you’re transferring, so for $1,000 a 3% fee is only $30. When you’re dealing with lower amounts like this, balance transfer fees are manageable, but with larger balances those fees can add up.
“Typically if you’re at a high interest rate currently and you’re moving that debt to a 0% card or to a card with a much lower rate than you had before, you’ll save money,” says Frankeneberger. “You’ll generally save more money in interest in the long run by doing a balance transfer. But you have to kind of look at it to really make sure. Because balance transfer fees can add up. Every once in a while you’ll find an offer that waives the balance transfer fee or reduces it. They do exist. They’re out there. So that’s something that people can also look for when they’re considering different balance transfer offers that are out there.”
How to Use Balance Transfers Safely
There are some definite steps consumers can take to use balance transfers without digging ourselves into a deeper debt latrine. To make the best use of balance transfers while avoiding the pitfalls, make sure you have a plan to pay your balance down. You’ll also want to watch out for certain dirty balance transfer tricks like deferred interest. It’s also very important to stop new credit purchases, as we explain below.
Have a Plan for Paying off Balance Transfers
If you’re going to use balance transfers to save on credit card interest, the first thing is really to have a plan. If you’re genuinely trying to maximize the fact that you don’t have an interest rate, and you’re really trying to pay down your debt, be sure you’re in a position where you can make larger payments. Be sure you can pay off a specific amount of debt in a specific amount of time. So again if you have a six month interest free period, and you owe $600, you have to be in a position where you can pay at least $100 a month to get it paid off in that time frame.
“I’m not saying you absolutely have to pay your debt in full by the end of the six month period to make a balance transfer worth it,” says Frankenberger. “However, if you’re unable to pay it off in that time frame you have to be prepared to pay the higher interest rate at the end of it. So this is something that a lot of times we don’t focus on. Be sure to ask yourself, what is the interest going to be after that introductory balance transfer period? Sometimes it could be higher than what you’re currently paying on your credit card. So you have to really just make sure that it makes sense for you to look at what that balance transfer card offers as a whole.”
Also see: 8 Big Ways to Pay off Student Loan Debt
Beware of Balance Transfer Checks
Sometimes credit card companies will offer balance transfers in check format. In that case, a consumer could even deposit that money in your bank account. Companies sometimes offer balance transfers in that way, but you really have to make sure that it’s being billed as a balance transfer and not as a cash advance.
“Sometimes people don’t understand that a check that a check that could be sent to them is actually going through as a cash advance,” says Frankenberger. “That could have a much higher interest rate and is not treated the same way as a regular balance transfer.”
When Using Balance Transfers, Stop New Credit Purchases
When consumers use balance transfer cards for new purchases, they can dig themselves into deeper debt. That’s credit cards with 0% interest on balance transfers often have a different, higher rate for purchases.
“Some people are in debt to the point where a lot of their cash is just going to pay their debt and their credit cards every month,” says Frankenberger. “So then when something happens like a repair or something else comes up, they’re then using credit. So if you’re doing balance transfers for the purpose of trying to pay debt down, you really have to stop using credit in the meantime to charge for purchases. Otherwise you’re still accumulating debt, just at somewhat of a lower interest rate.”
Beware of “Deferred Interest” Balance Transfers
Shoppers should be very wary of deferred interest credit purchases or deferred interest balance transfers. Interest is “deferred” when there’s no obligation to pay it yet, but it’s still racking up in the background.
“This happens a lot with some retail accounts,” says Frankenberger. “Or say you’re going to buy furniture or maybe make an online purchase. They might say, hey, it’s 0% for six months, deferred interest, meaning that as long as you pay that balance off within six months there’s no interest charged. But if you don’t pay that balance off in the six months, the interest has been accumulating on the back end for that time and that entire amount will be tacked on to your balance. So that’s something to be wary of and make sure it truly is “no interest” or lower interest for a period of time.”
In other words, make sure the purchase or the balance transfer isn’t deferring or accruing interest in the background. Deferred interest balance transfers can be a real trap because sometimes life happens. When it happens to you, if you’re unable to pay off that purchase as planned, you can end up owing a whole lot more.
“You see this a lot with appliances, furniture and similar items and stores, and also even sometimes certain online purchases,” says Frankenberger. “So you definitely always want to read the fine print, but especially when doing a balance transfer. I have even seen it happen on certain major credit cards.”
Also see: 6 Easy Ways to Reduce Credit Card Debt
Avoid the Perpetual Balance Transfer Game
Some consumers are proud of their ability to “game” the credit card companies, transferring debt from one 0% interest balance transfer card to another indefinitely. This kind of tactic really isn’t anything to be proud of, and in fact it’s probably more dangerous than helpful.
“Number one, it takes a lot of discipline to be able to manage balance transfers and debts that way,” says Frankenberger. “It can work for folks who are really just in debt repayment mode. Balance transfers can work fine for people who are in a place financially where they don’t have to use credit further to make purchases or to live or for expenses. If you’re not charging at all, you’re really focused on paying your debt down, you’re taking advantage of all these different balance transfer offers, if you are very strategic and disciplined about it, you can make it work to your benefit.”
High Credit Scores Help a Lot With Balance Transfers
People who can play the balance transfer game successfully aren’t typically people with bad credit. That’s because the best balance transfer offers go to consumers with the highest credit scores.
“These are folks that typically have very, very high credit scores,” says Frankenberger. “Because to be able to get approved for the best options and the best balance transfer offers that are out there, you have to have good credit and a solid income and all those things that make you credit worthy. I believe it’s a person with a very specific set of circumstances who can make that work, whereas maybe it doesn’t fit the general population as a whole.”
Who Do Balance Transfers Work For?
Balance transfers typically work best for a very specific type of person. As an example, take someone who previously had bad spending habits and racked up $10,000 in credit card debt. They’ve changed their habits now. They’ve stopped overspending. They’re making payments well above the monthly minimums. They’re paying down their debt, and they’re no longer making purchases with credit cards. That person can save a lot of money in interest charges by transferring their balances to 0% interest balance transfer cards.
When Balance Transfers Don’t Work
Balance transfers won’t save money for many consumers. Consumers with less than stellar credit won’t get approved for the best balance transfer terms. Many people aren’t in a position where they can completely shut off spending on credit to be able to focus on paying that debt down. Those people might just be opening more accounts and accessing more credit that they ultimately will use, and that could end up getting them in a deeper hole.
To Save Real Money With Balance Transfers, Everything Has to Be Aligned
“It’s almost like anything else in life,” says Frankenberger. “A sale can be tempting. We see that a store is offering 20% off your purchase. You get this balance transfer offering a lower interest rate for a certain period of time, and our intentions may be good in thinking, wow, this can really save me a lot of money. But again, you don’t want to be continually opening new accounts that can impact your credit score if you have too many new applications for credit.”
Balance Transfers Can Hurt Your Credit Score
Consumers have to be cautious about how balance transfers affect their credit scores. In some cases, someone can save money by doing several balance transfers, only to find they’ve completely sunk their credit rating. Now they’re suddenly stuck with a giant hot potato of debt that they can’t transfer to a new balance transfer card because they can no longer get approved.
“I’ve seen people who shuffle things around and do a lot of balance transfers and they continually close their old accounts,” says Frankenberger. “That can have a negative impact on your credit rating, because you’re not only reducing your overall available credit by closing accounts, but these might have been accounts you’ve had for a very long time. Closing those old accounts can affect your length of credit history. So any time you open an account, close an account, or do anything like that, there’s a potential impact to your credit score that you have to consider. So just make sure that you’re thinking about the situation as a whole. I think that for the kind of regular, typical person who maybe is doing a balance transfer here or there, once a year, maybe less than that, that’s not as much of a big deal. But somebody who’s really managing multiple accounts and every few months is assessing things and opening and moving things, it may end up having a little bit of a negative impact to your credit rating.”
Watch For Multiple Interest Rates on Balance Transfer Cards
It’s fairly easy to figure out how to pay off a certain amount of debt in a certain amount of time if you have a 0% interest rate and that’s all you owe on the card. It gets more complicated if you’re also making purchases on that same card unless the purchase interest rate is 0% as well.
“That’s because you’re making purchases and you’re most likely paying a different interest rate on those,” says Frankenberger. “So say your interest rate is 12% on your purchases but you transfer a balance for 0%, the way that your payment is applied, you don’t get to choose. What I mean by that is, if you pay above your minimum payment, the credit card companies are required to apply any additional payments to your highest interest rate. You’re not allowed to call them up and say, hey, please apply this $50 to my 0% balance. This comes from the Credit Card Act of 2009. So the card issuers are required again to apply anything above the minimum payment to the debt with the highest interest rate first.”
What that means is, the debt with the 0% balance hangs around and waits for the six months to run out. Meanwhile, the consumer is unknowingly paying down the higher interest debt. At the end of the trial period, the balance transfer amount kicks over to a higher interest rate and the consumer’s savings gets erased.
Alternatives to Balance Transfers
Consumers looking for alternatives to balance transfers do have options. There are several things people can try that don’t carry as big a risk of getting mired even deeper in debt or scuttling a credit score.
Ask Your Credit Card Company for a Lower Rate
“Sometimes the credit card company is able to offer you something,” says Frankenberger. “Other times they can’t, but the worst thing they’re going to say is no. So it’s not going to hurt anything to call and ask. If you can keep your debt with the existing creditor or keep your account open, that would be good for your credit score and creditworthiness in the long run.”
Consolidation Loans Instead of Balance Transfers
Another thing that people can do is find out if they can get a consolidation loan. If you have a smaller amount of debt, maybe under $10,000, you may be able go to a bank or a credit union and get a lower interest rate loan to pay off those accounts in one shot.
“You’re kind of taking the same mindset of doing a balance transfer,” says Frankenberger. “You’re saying, okay, I’m going to put everything here to try to get it paid down more quickly. Since that amount is in a loan, it’s going to be a set payment amount and a set time period, so it gives you that specific end date. 0% loans are pretty hard to come by, but if you can reduce the interest rate that you’re currently paying, it can still save you some money.”
Emergency Funds Instead of Balance Transfers
Often when people carry debts they can’t pay off, there aren’t really emergency funds available. However, a good preemptive strategy to avoid having to deal with balance transfers is to start up an emergency fund.
But what about if you have money in the bank already? Should you do a balance transfer in that case, or pay off what you owe as soon as possible?
“Most often,” says Frankenberger, “you’re paying a whole lot more in interest than what you’re gaining from having that money sit in the bank. So that can be a way to look at it, but you don’t want to clean yourself out either. You don’t want to take every penny that you have to go towards debt if you have no backup, because then if something comes up again, where’s that purchase going to go? It’s probably going to go right back on the credit card.”
Talk to a Credit Counselor
Still asking, “Should I do a balance transfer?” There are always credit counseling agencies there to help consumers figure out their debts and come up with a good plan for paying them down.
“Consumers can talk to an agency like ours,” says Frankenberger, “where you can speak with a credit counselor and try to get some professional help in obtaining lower interest rates and lower payment amounts.”
To get help with questions about balance transfers or other debt related issues, contact Consumer Credit Counseling Service of Buffalo, or to find a nonprofit credit counselor near you, take a peek at the credit counselor finder on the National Foundation for Credit Counseling’s website by clicking here.