Are Balance Transfers a Good Way to Pay Down Debt?

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If you can score a good promotional offer, a balance transfer could help supercharge your debt repayment—but it’s not risk-free.

So, you’ve decided to pay down your debt. Congratulations! Now comes the hard part: actually doing it.

There are a couple different ways to go about it. You could consolidate your debt and turn a bunch of scattered payments into one larger payment. You could also use the debt snowball or the debt avalanche methods, where you put all your extra debt repayment funds towards one debt at a time.

And then there’s using balance transfers, which is where you take credit card debt from one card and transfer it over to another. Under the right conditions, it can be a great way to reduce your overall debt load, but it’s a method that definitely comes with some risks.

Let’s dive in, shall we?


How do Balance Transfers Work?

Credit cards use something called a “revolving balance.” Whenever you spend money on your card (or take out a cash advance, which we wouldn’t recommend) that money is added to your total balance. Every month, you then have to pay at least a minimum amount towards what you owe—usually something like three percent of balance minimum plus $15.

These minimum payments are a great way for credit card users to rack up debt without having to pay the price—at least in the short-term. Because the minimum payments for credit cards are so small, it can take years and years to pay off the full amount. And as long as the debt is outstanding, those balances will keep racking up interest.

With a balance transfer, you take the balance from one card and place it on another. You’re essentially using one credit card to pay off a different one. Balance transfers almost always come with a fee—something like two to three percent of the total amount transferred.

There are several benefits to balance transfers, but are they big enough to make a difference?

Now, you might be saying to yourself, “Why would I transfer debt from one card to another? How does that help me pay off debt?”

Well, hypothetical-person-that-we-just-made-up, you’re absolutely correct! Balance transfers by themselves don’t have much of a debt reduction benefit. Heck, when you include the balance transfer fee, you’re actually increasing your total debt load! So what gives?

Let’s start with the least impactful benefits and work our way up.

If you have balances on a bunch of different credit cards, then a balance transfer can be a useful way to consolidate your debt. Managing one payment per month is certainly a lot easier than managing five or more.

But if you’re still only making the minimum payments on that card, then you’re still staring down years and years of accrued interest before your debt is paid off.

That calculation changes if you can transfer the debt to a card with a lower interest rate. In fact, you definitely should not consider transferring a balance if you can’t secure a lower interest rate.

Accruing less interest means that the money you’re putting towards that debt goes farther. Even if you paid the same amount you were paying to your previous card’s minimum payment, more of that money will now be going towards this card’s principal balance.

Scoring a lower interest rate means getting out of debt faster. But in the grand scheme of things, you’ll still be paying off that card for years to come.

But what if we told you that you could pay no interest at all?

Balance transfers are best used with promotional offers.

If you have a halfway decent credit score, then you are probably familiar with promotional credit card offers. These companies really want you to open up a card with them, and they are willing to offer you some pretty great benefits to get you to apply.

One of those benefits is a period where your balances transferred to the card carry a zero percent APR. (APR stands for “Annual Percentage Rate.” It measures how much a debt will cost in fees and interest over a full year.) Oftentimes, these periods of zero percent APR last for a year or more.

That’s huge. Aside from the balance transfer fee, it essentially means that this debt will be free for as long as the zero percent period lasts. Now, that doesn’t mean that you won’t have to make monthly payments. There will still be a minimum amount due every month. It’ll just be much smaller.

And, besides, the point of using a zero percent APR promotional offer to pay down your debt isn’t to pay less. It’s to make the money you can pay go further. In fact, the best way to handle a transfer like this would be to budget even more money towards your payments. Pay off as much of the debt as you can before the zero percent APR offer expires.

Here’s the catch: You probably can’t score an offer with bad credit.

Yeah. Remember how we mentioned having a “halfway decent credit score” up top? Well, that street goes both ways. If you have a bad credit score, you’re probably not getting a lot of these offers made to you. Plus, you’re less likely to be approved for the offers you do receive.

This is one of the many ways in which having a bad credit score makes your life more difficult—not to mention more expensive. If you have bad credit and are looking to pay down your credit card debt, you won’t have many options to reduce your interest rates or consolidate your debts.

Our advice? Look to minimize expenses through careful budgeting and pick up a side hustle to maximize your earnings. The more money you put towards your debt repayments, the sooner you’ll see progress.

After you get your credit utilization ratio below 30 percent, you should hopefully see a bump in your score. (It helps if you have a sterling payment history.) And once you start seeing promotional offers arriving in the mail, you can reassess your situation and look into reducing your interest rates.

Balance transfers have downsides too, and can easily lead to more debt.

Let’s be clear: Balance transfers, even with a zero percent APR offer attached, aren’t some kind of magical money cure-all. They can seem like one though, and that’s because the dangers of using a balance transfer are a little harder to define than the benefits.

Basically, the problem with using a balance transfer to pay down your existing debt is that leaves you very vulnerable to temptation. All of a sudden, this card that used to have a massive balance is totally clear. And heck it’s not like you’re paying any interest on that money for the money six, 12, or 18 months.

When the urge to spend beyond your means arises, those open cards will call to you. You have to make sure you don’t answer!

Truly, there’s nothing like an entirely clear balance and an untouched credit limit to tempt you into unnecessary purchases. If you’re doing a balance transfer, you need to be very careful about adding extra debt on top.

Rather than closing out your cards—as those open credit limits can actually benefit your score—you should make sure that you absolutely cannot use them. Cut up the physical cards. Lock them in a secret safe at your parent’s house. Bury them on a deserted island. Do whatever it takes to prevent you from racking up more debt.

Even better: build up an emergency fund so that you won’t even be tempted to use one for surprise expenses.

Balance transfers can be a great tool for paying down debt, but the nature of credit cards means they come with a mean double edge. Before you use one, make sure you know exactly what you’re doing.

To learn more about getting out of debt, check out these related posts and articles from OppLoans:

Have you had success using a balance transfer to pay down debt? Or did a balance transfer end badly? We want to hear from you! You can email us, or you can find us on Facebook and Twitter.

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The information contained herein is provided for free and is to be used for educational and informational purposes only. We are not a credit repair organization as defined under federal or state law and we do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit. Articles provided in connection with this blog are general in nature, provided for informational purposes only and are not a substitute for individualized professional advice. We make no representation that we will improve or attempt to improve your credit record, history, or rating through the use of the resources provided through the OppLoans blog.