By Andrew Housser
If you carry credit card debt, offers to transfer your debt to another card might be tantalizing. Some of these offers promise lower interest rate, while others dangle rewards such as thousands of airline miles in exchange for your debt balance.
Balance transfers are a way to move debt amounts from one credit account to another. A credit card balance transfer can sometimes be beneficial -- but it also can be dangerous. Before making a decision about credit card balance transfers, consider these pros and cons.
Pros:
Most commonly, to receive balance transfer offers, you must have a good credit history. If you do, balance transfers can offer some potential benefits.
1) Save money on interest fees
New credit card offers currently have average interest rates of about 14.35 percent. If you are working to pay off a balance, you can save money on interest fees by transferring your balance to a card with 0 percent interest. Read the fine print and be sure you understand the rate on your card agreement, not just on the initial offer letter.
2) Pay balances faster with payments going straight to principal
People who are good at managing bills might be able to pay off a transferred balance faster, because, on a zero-percent transfer offer, the full payment goes to principal. Be sure to keep track of the terms of your agreement, as most zero-percent offers are for six to 12 months only. If you have not paid the balance within that time period, your interest rate will increase, and you will lose the benefit of the balance transfer on the remaining balance.
3) Earn rewards
Some people transfer balances to get rewards. Many times, though, these rewards are over-rated. The credit card might carry a higher interest rate or an annual fee. Be very careful.
Cons:
On the other hand, credit card balance transfers can have several major disadvantages, especially for those with trouble controlling spending or people with financial trouble. Consider these issues.
1) You might add to your problems
Balance transfers can give a false sense of progress on paying off debt. If you cannot control your spending, you might run up bills on both the old and the new card. If you don't pay on time, the introductory transfer rate might jump to a higher penalty rate. And moving balances around from card to card can alert creditors to financial problems.
2) Fees sometimes outweigh savings
Most balance transfer offers come with fees, often about 3 percent of the balance that you transfer. If you transfer a $10,000 balance, the fee will total $300. Consider the interest rate you pay now, your potential savings and the likelihood that you will pay the bill off before the introductory rate expires.
3) Watch the timing or you might lose out
Carefully read the fine print and be realistic about your ability to repay a loan, even with a better interest rate. Otherwise, you can end up with multiple credit cards, all charging high interest rates.
4) Transfers can lower credit scores
Balance transfers can hurt your credit. For example, credit bureaus usually calculate credit utilization -- the amount of available credit you use -- for each card. If you transfer a balance to a card with a lower credit limit, your "available credit" might go down. New credit card applications also can hurt credit scores. And adding new cards lowers your "credit age," or length of time you have had each credit card, which can impact your score.
5) Many people do not qualify for transfers
If you are looking to transfer funds because you are having credit problems, be forewarned that credit card companies usually offer good transfer deals to keep customers who have solid credit records. Be especially vigilant in looking for information about annual fees or other charges.
When you consider a balance transfer offer, remember that if something sounds too good to be true, it probably is. Remember that credit card banks are in business to make money. Be smart when you evaluate credit card balance transfers, and if you are drowning in debt, seek out a debt relief consultant who can help you with a workable plan to get out of debt.
If you are working to pay off a balance, you can save on interest by transferring your balance to a card with 0% interest. (©iStockphoto.com/Christophe Testi)
Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.
