Discerning whether to take advantage of a financial offer, like a balance transfer card, can be tricky. Reader, Kenny, wrote in asking about whether doubling down on a balance transfer card makes sense for his situation. Colin, our financial expert, goes through all the things to consider before making this decision!
The question
Hi Experts,
Kenny, I.
I went a little overboard and racked up some debt. To get things back under control, a year ago I transferred everything onto a balance transfer card. So far, it’s been a good move. It’s been easier to track things and I’ve been keeping up with payments. I was just planning on staying the course until last week when I got a balance transfer offer from the same company. I still have some other debt that I could transfer over. So I’m considering transferring more over. Is that a good idea though? Would it be better to just keep going until the offer I’m in now ends in March?
Thanks,
The answer
It’s great that you’re taking a proactive approach to paying down your debt, and a balance transfer card can be a wise choice if the offer makes sense. Many people have the right intentions when they open one of these cards, but struggle to stick to their plan. The fact that you’ve managed the payments for a year shows that you’re making progress.
Your question was whether you should transfer additional debt to a new promotional offer or continue with the current offer until it ends. The short answer to your question is that it depends.
To help you make the decision that’s best for you, I’ll explain how balance transfer credit cards work, including some potential costs you may incur.
How balance transfer credit cards work
A balance transfer credit card is a type of credit card that offers a promotional annual percentage rate (APR) for a set period, on high-rate balances transferred from regular credit cards or retail store cards. For example, instead of paying 21.99% interest on your existing credit card, you might pay 0% or 1.99% on a balance transfer card, for six to 12 months, sometimes longer.
At first glance, these offers seem like a no-brainer. With your interest rate lowered to 0% or nearly 0%, a greater portion of your payment is applied toward the principal balance. Depending on how much you owe, you could save hundreds of dollars in interest. Who wouldn’t want to take advantage of such a great deal?
However, before you agree to a balance transfer, consider the following pros and cons.
Advantages of using a balance transfer credit card
Lower interest costs
The most obvious benefit of a balance transfer credit card is the opportunity to save big on interest costs. Let’s say you transfer a $5,000 balance from a credit card with a 21.99% interest rate to a balance transfer card with a 0% interest offer for 12 months. You could save approximately $1,000 in interest charges over the entire period, and ensure that your minimum payments are actually making a difference.
Easy to manage
Consolidating multiple credit card balances into a single balance transfer credit card means that you’ll only have one monthly payment to worry about. It’s a lot easier to manage than juggling multiple payments each month.
Psychological benefits
Seeing your debts consolidated into a single balance, with an affordable payment and low interest rate, can be very motivating and make you feel as though you’re finally making progress. The psychological benefits can give you the confidence to make other good financial decisions.
Drawbacks of a balance transfer credit card
There are fees involved
Most balance transfer cards charge a fee of 1% to 3% of the amount you move over. That means you would pay between $50 and $150 upfront for a $5,000 transfer. Not only that, but if the balance transfer card charges an annual fee, that’s an additional cost you need to account for.
There is a time limit
Balance transfers typically have an expiry date of six to 12 months. If you haven’t paid off the balance in full by the end of the promotional period, your interest rate typically returns to the standard rate. If that rate is higher than the rate you were paying on the original credit card, you may end up paying more interest in the long run.
There may be limits on how much you can transfer
You won’t be able to transfer over more than your existing credit limit. So, if you owe $5,000 on your current credit card, but only have a $3,000 limit on your balance transfer card, you won’t be able to transfer the full amount owing. This situation may also occur if you are attempting to transfer balances from multiple cards.
Temptation to spend
A mistake people often make is executing a balance transfer, only to rack up the balance owing on the newly paid-off credit card. Doing so can defeat the purpose of the balance transfer, especially if you paid an upfront fee.
It’s also important to note that the promotional rate only applies to the balance transferred over. If you make new purchases with your balance transfer card, they will incur interest at the regular rate, and charges could quickly accumulate.
Questions to ask yourself
Back to your original question of whether it’s wise to move over additional debt using the new balance transfer offer or pay off the original balance transfer first, here are a few things I’d recommend that you consider:
1. What’s the interest rate on the current debt you have? If it’s a high-interest credit card, it could make sense. However, if it’s a lower-interest card, the savings might not be worth it. You need to do the math.
2. How much will the balance transfer fee cost you? Remember that the balance transfer fee must be paid in full, up front. To ensure the new transfer is worthwhile, include the fee when you’re calculating the interest savings.
3. Can you pay off the debt before the promotional period ends? Let’s say you move over $3,000, and the promo period is six months. You would need to pay at least $500 each month to pay off the balance in full. Is that affordable? If it isn’t, do you have a plan to handle the remaining balance?
My advice for you
Since your current offer doesn’t end until March, you still have several months to keep chipping away at your balance. It isn’t a bad idea to stick to your current plan, especially since you said you’ve been staying on track and keeping up with the payments.
That said, the new offer might be too attractive to turn down. For example, if it’s a low fee, 0% interest offer for 10 or 12 months, it sounds like a smart move. On the other hand, if it’s a 3% fee on a 2.99% interest offer for 6 months, you might be better off waiting. You never know; you may receive a better offer closer to March.
Either way, ensure you run the numbers, avoid using the old card once the balance is transferred, and create a plan to pay off as much as possible before the promotional period ends.
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