Should You Balance Transfer Your Credit Cards?

When dealing with debt, one strategy that I always recommend is debt consolidation. There are a few different ways of doing it, but the general idea is, you get a low-interest loan and pay off all your debts. After that, you’ll just be paying a single loan at that lower rate.

Alternatively, you could do a credit card balance transfer to help reduce your debt. This can be appealing because some credit cards will offer 0% interest for a fixed amount of time. If used effectively, you can pay off hundreds of dollars in debt quickly. Some people are worried about the risks, so they wonder when you should balance transfer your credit cards.

Should You Balance Transfer Your Credit Cards

Credit card balance transfers explained

Before deciding if you should balance transfer your credit cards, you need to understand exactly what a balance transfer means. It’s actually very similar to the scenario I explained above.

First, you open up a new credit card account that allows a balance transfer. Some cards are designed specifically for balance transfers such as the MBNA Platinum Plus MasterCard and the Scotiabank Value Visa Card. They both offer 0% interest, but that only lasts a set amount of time, so you’ll want to take advantage of it.

With your new credit card, you pay off your other debts. You’ve now essentially moved all of your debt to the lower interest credit card, hence why you could save hundreds or thousands of dollars.

Why should you balance transfer?

As explained above, the savings is why you would consider a balance transfer. Obviously paying 0% compared to 19.99% is a much better deal. There can sometimes be a fee associated with balance transfers, so you would have to do the math to figure out if it’s worth your while.

Balance transfers almost sound too good to be true. Why would a credit company allow you to move your balance offer for a lower rate? Well, many lenders know that it’s unlikely that you’ll pay off your entire balance during the teasers rates. Since you’ve already transferred your debts over to them, they’ll start making money off your interest payments.

When deciding to do a balance transfer, you’ll need to look at the promotional rate and the long term rate. The 0% interest rate is obviously appealing, but if it resets to 21% later, how much are you really saving?

Is there a bigger problem here?

Again, credit card balance transfers can be a good strategy to reduce debt, but you need to ask yourself how you managed to get yourself into this position.

Most people who consider a balance transfer have run up a pretty healthy balance on their other credit cards. They’re struggling with their payments, hence why they’re looking for some relief. This signals a spending problem which needs to be addressed.

Some people will even apply for low-interest credit cards because they’re hoping to access cheap credit. This is the wrong reason to be applying for a credit card.

Final word

If your goal is to reduce your debt, then doing a credit card balance transfer is perfectly fine. You just want to make sure that you’re selecting a card that has a reasonable interest rate after the promotional rate ends.

By | 2018-01-31T20:53:06+00:00 January 22nd, 2018|Credit cards, Personal Finance|

4 Comments

  1. Chan January 24, 2018 at 4:43 pm - Reply

    What about using one’s own line of credit (unsecured / secured) to quickly pay off debts (e.g. credit cards) and get lower interest rate? Will using a line of credit affect my credit scores?

    • Barry Choi January 24, 2018 at 7:38 pm - Reply

      Hi Chan,

      A line of credit is good also since it’ll have a lower interest rate than your credit cards. Balance transfer credit cards offer an even lower interest but usually for only 6-12 months. If you already have a line of credit open, it won’t affect your credit score.

  2. Big Cajun Man (Alan Whitton) January 26, 2018 at 9:53 am - Reply

    The overriding danger with consolidation is this should really only be done ONCE, however, some folks become consolidation junkies. I meet so many folks where this becomes a merry-go-round and they keep transferring or consolidating until they have to finally end up talking to a Bankruptcy trustee or someone similar.

    Please remember this is really an EMERGENCY move, don’t think of it as something you can just keep doing.

    • Barry Choi January 26, 2018 at 5:02 pm - Reply

      BCM,

      That’s a very valid point. Balance transfers are only good if you’re doing them with an intent to pay off your debt quicker. It can be a dangerous trap to keep transferring your balance.

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