5 Times a Balance Transfer is a Bad Idea

The costs of balance transfers can exceed the benefits — if, for example, your debt can be paid off quickly, you struggle to make on-time payments or your credit is subpar.

Claire TsosieMay 28, 2020
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5 Times Balance Transfer Bad Idea

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A credit card balance transfer done strategically — say, by moving debt from a high-interest card to one with a long 0% APR promotion — can save you a bundle in interest charges. But it's not a cure-all for debt. Sometimes, it might even hurt more than help.

Here are some cases where the costs of doing a balance transfer can exceed the benefits.

1. The debt can be paid off quickly

A balance transfer generally isn't worth the cost or hassle if you can pay off your balance in three months or less. That's because balance transfers typically take at least one billing cycle to go through, and most credit cards charge balance transfer fees of 3% to 5% for moving debt. By the time it goes through, that fee might exceed what you’d normally pay in interest charges if you didn’t move it.

Even if you have a card that doesn't charge a balance transfer fee, moving a debt that can be paid off in a short period of time might not be worth the trouble. Opening a new card will trigger a hard pull on your credit report, which can cause your scores to dip temporarily. You'll also have yet another account to manage after the debt is paid off.

What to do instead

If you can pay off the balance within three months, doing so without a balance transfer is your best bet. You'd likely spend less overall by paying it off during that time — interest charges and all — than if you paid interest while the transfer was going through, then paid the balance transfer fee to move the balance to a different card.

2. You struggle to pay on time

Paying credit card bills late is always expensive, but paying a 0% annual percentage rate offer late after moving over high-interest debt to the account can be downright painful. In some cases, a missed payment could void your 0% APR offer and cause your APR to spike to around 30%. You'll also have to pay fat late fees. All of this could erase the potential benefits of getting such a card in the first place.

What to do instead

Trim expenses by prioritizing on-time credit card payments. You can do this by setting your credit card up for autopay, so the minimum due is automatically deducted from your bank account. Make additional payments based on how much you can afford each month.

Alternatively, if you're worried about overdraft fees, set reminders for yourself to make payments. Or try making two small payments a month rather than one. Look into balance transfers once you're confident you can make every payment on time.

3. Your credit is subpar

The best balance transfer offers — notably, ones with long 0% intro APR periods on balance transfers — generally require good or excellent credit (typically, FICO scores of 690 and higher). It's difficult to find such a deal with so-so credit. And if you do, you likely won't get approved with a high limit, making it hard to squeeze much value from the offer.

Can you move balances among the cards you already have without a promotion handy — say, from a card with 30% APR to a card with 20% APR on balance transfers? Sure. But it takes much longer to come out ahead on savings since a balance transfer fee is charged upfront and the difference between your old and new APR is relatively small. In many cases, such a move isn't worth the cost.

What to do instead

When you can't qualify for low-interest offers, your next best bet is paying off your balance as quickly as possible. To minimize the interest charges, try the debt avalanche method — that is, paying down the highest-interest balances first. Or, if you need some quick wins to motivate you, try the debt snowball method, in which you pay down the smallest balances first.

4. Credit cards tempt you to spend more

For some, getting a new credit card — and using it to park old debt at 0% APR — just makes it more tempting to overspend and run up another balance. In the meantime, you might make just the minimum payments on your debt, thinking, "I'll deal with that later."

If you find yourself caught in this frustrating cycle, getting a new balance transfer card might be counterproductive. The money wasted through overspending would likely outweigh any money saved through the balance transfer.

What to do instead

Try consolidating debt with a personal loan instead. These come with fixed monthly payments, making it harder to procrastinate on paying off debt as you might with a credit card. Also nice: You can pre-qualify to see how much you could potentially borrow and what interest rate you might get before actually applying.

A loan won't fix your spending habits, of course — that's up to you. But the structured payments might make it easier to remain disciplined and stick to good habits while paying off debt.

5. You're overwhelmed with debt

When you're up to your ears in debt, taking advantage of a balance transfer offer is just like kicking the can down the road. Rather than helping you pay off debt interest-free, it can prolong difficult decisions unnecessarily.

In part, that's because balance transfers don't allow you to move huge amounts of debt. Assuming you can qualify for an offer — which can be hard to do with a heavy debt load — there's a limit to how much you can transfer. If you have $80,000 in credit card debt, for instance, and get a balance transfer card with a limit of $6,000, you'll only be able to move over a small portion of your overall debt.

What to do instead

Consider nonprofit credit counseling if your debt feels insurmountable — for instance, if it's stopping you from meeting other financial goals, or if you don't see a way of paying it off in the next five years. In some cases, a debt management plan, where debts are consolidated into a single balance and interest rates are cut, might make sense. In more serious circumstances, bankruptcy might be the best alternative. Thinking about such measures might be the last thing you want to do, but doing so now instead of later could save you time and money over the long haul.

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