Balance Transfer Credit Cards

The Pros And Cons

Much like debt consolidation loans, the use of balance transfer credit cards does not reduce the debt that you owe, but merely "shifts" it from one creditor to another. And of course merely shifting your debts around will not solve your debt problems.

Now, that's not to say that as part of a larger debt reduction plan credit card balance transfers cannot be a useful tool. They can. But I would advise you not to jump at the first 0% interest rate credit card offer that you find, without first understanding what you should be looking for in terms of details.

Some cards offer zero interest but high transfer fees. Others only offer a short "intro period". Still others offer no fees, but do charge a low interest rate (as opposed to 0%) on transfers. There is no single "best balance transfer credit card" for everyone, but if you know what to look for, you can find the best one for you.

The "Pros" Of Balance Transfer Credit Cards

1. Low or zero percent interest rates. There is really only one reason why you would consider applying for balance transfer credit cards, and that is the offer of low, or in some cases 0%, interest rates on any balances transferred. And if you are presently carrying a balance on one or more credit cards (and paying substantial interest each month), you will likely be able to save yourself a considerable amount of that interest (if not all of it, at least for a while) by transferring the existing debt to a balance transfer credit card.

For example, let's say that you have $10,000 in credit card debt at 19% interest, and monthly minimum payments equal to 2% of the outstanding balance. If you just continue to make the minimum payment each month, it will take you 54 years and cost you $35,198 in interest before that credit card debt is gone. (And yes, those number are accurate.)

Now consider the scenario whereby you take advantage of the benefits of balance transfer credit cards.

If you were to transfer that $10,000 onto a 0% interest credit card, and continue to pay $200 per month each month, you would have the debt paid off in just over four years (50 months to be exact) and pay zero interest.

In summary you would...

save yourself $35,198 in interest charges and become debt free 50 years sooner.

That's the good news. But as I cautioned earlier, make sure that you understand some of the pitfalls associated with these types of cards by reading the fine print and "terms and conditions" of the offers.

2. No security is required. What I mean by that is unlike a home equity debt consolidation loan, transferring your debt to a new credit card does not require you to pledge any security for the money. People who do opt for a home equity loan to pay off their credit card debts are often times putting their home ownership at risk unnecessarily.

The "Cons" Of Balance Transfer Credit Cards

1. Balance transfer fees. Most balance transfer offers come with a significant "catch". And that catch is the balance transfer fee. A typical balance transfer fee is equal to 3% of any balance that you transfer onto your new credit card. So on a $10,000 transfer, your fee would be $300, which is automatically added to your new card's balance.

Another thing to be aware of is the fact that some card companies charge higher balance transfer fees (sometimes as high as 5%) for balances transferred after you receive your new card. In other words, only balances transferred at the time you make the application qualify for the lower, 3% balance transfer fee. All subsequent transfers are charged a higher rate.

2. Potential for increased minimum payments. Here is a prime example of why you have to read the fine print on balance transfer credit cards (or any credit card for that matter). Let's say that you are currently carrying $5,000 balances on two credit cards and paying 19% interest. Your minimum payment amount on each card is 2% of the outstanding balance each month or about $100. Therefore, in order to keep your payments current, you need to come up with approximately $200 every month towards these debts. (I say approximately because the monthly payment will decline slightly each month as you slowly pay down the balances.)

Unfortunately, of the $200 you pay each month, about $158 of that is interest. In other words, you are only paying down those credit cards by $42 each month. And at that rate it will take you a lifetime (41 years to be exact) to become debt free.

Wisely, you begin to explore transferring that $10,000 debt to a new credit card. But not just any new card. No, a card with the holy grail of interest rates, 0%. You realize that if you were not paying 19% interest each month, and were able to apply the $200 payment directly to paying down the principle of the debt, you could pay off the balance much quicker. In fact, if you paid $200 per month, with no interest charges, that $10,000 debt would be gone in just over four years (compared to over 40 years at the 19% interest rate).

Convinced that this is the way to go, you sign up for a new 0% interest credit card with a $10,000 credit limit and transfer your existing balances over. But the next month (when you get your first statement) you get a big surprise. Instead of having to pay $200 every month, you now have to pay $400 per month.

You see, many balance transfer credit cards have a stipulation that if the balances transferred to the card exceed 90% of the credit limit, the monthly minimum payment jumps to 4% of the outstanding balance. So although you are no longer paying interest charges each month, you now have to come up with twice as much money to make your payments. And if you can't manage this, you might just end up in a worse situation. Read more on zero percent credit cards and minimum payments here.

3. The low interest rates are only "introductory" rates. The 0% and low interest rates that are offered on balance transfer credit cards are what is known as "teaser" rates. These rates last only last for the length of the introductory period which is typically 6 to 18 months long, depending on the credit card offer and sometimes even depending on your credit score/credit rating.

After the introductory period ends, the APR (annual percentage rate) will increase to a much higher rate. If you want to continue to enjoy the low interest rates beyond the introductory period you will have to try something called the "zero interest credit card shuffle".

4. Consolidating credit card debt that you owe on existing cards using a new credit card, does not reduce the amount of debt owed. Even if the new credit card has a 0% APR on balance transfers, if you transfer $10,000 from one credit card to another credit card, you still owe $10,000. And without a bigger picture debt reduction plan in place, you will likely end up back where you started (paying double digit interest rates) within 12 months, and with a slightly poorer credit report/score.

5. Balance transfer credit cards are difficult to obtain if your credit score is not "very good". If your credit score (FICO score) is not at least above 620, you will have a difficult time qualify for a new credit card to transfer your balances to. Don't worry too much if this is the case however, because there are other ways to reduce the interest rates you are paying on your credit card debt without transferring your balances.

Balance Transfer Credit Cards As A Debt Relief Tool

As I mentioned above, balance transfers can be a valuable tool for reducing debt more quickly, but they are not "the" answer to your debt problems. Learn more about integrating balance transfer credit cards into an overall debt relief plan here.