Are Credit Card Balance Transfers a Smart Move for You?

Balance transfers with promotional rates can help avoid high credit card interest, but they may also lead to greater debt.

After her home renovation exceeded her budget, Carrie Wiley from New York City faced about $18,000 in unexpected credit card debt. With steep interest, she was shelling out around $400 monthly just in interest.

“Realizing how much was going toward interest made me know I had to change my approach to pay off this debt faster,” Wiley explains.

She opted to open two new credit cards offering a no-interest period for transferred balances. These promotions are often used by companies to attract new clients, generally offering low to no interest for a term of nine to 18 months.

Despite feeling anxious about transferring balances and applying for more credit, Wiley concluded it could be a beneficial financial strategy if approached carefully.

“I avoided interest for 15 months while actively paying down my debt,” she shares, noting she managed to eliminate the debt in just five months, ahead of her original plan.

For consumers like Wiley, balance transfers can indeed be a way to evade hefty credit card interest, but they also carry risks of accumulating more debt.

Here’s what to consider before you proceed with a balance transfer.

Helpful Strategy or Dangerous Gamble?

Opinions vary widely on balance transfers; some see them as a valuable tool, while others view them as a trap. While Wiley benefitted, many find themselves in deeper financial trouble after using this method.

Dara Schmoe, a 39-year-old math teacher from Snohomish, Washington, fell into this category. After college, she used credit cards to keep pace with friends who enjoyed travel and snowboarding, often realizing she was overspending and trying to address her debt problems.

“When my debt became overwhelming, I’d devise a plan to settle it, usually involving balance transfers,” she recounts.

However, after a few months of diligent payments, Schmoe would revert to overspending, eventually accumulating $15,000 in credit card debt.

“The reason this strategy backfired is closely tied to why I got into debt initially,” she adds. “I lacked knowledge on responsible credit use.”

Schmoe's experience is not uncommon.

“Balance transfers can cause issues for those who aren’t cautious with their spending,” warns personal finance expert Andrea Woroch.

Nonetheless, Woroch believes balance transfers can be useful if managed correctly.

“If you’re only making minimum payments on a high-balance, high-interest card, you’re wasting money on interest, prolonging your debt,” she states.

A low-interest option can accelerate the repayment process, but Woroch suggests having a strategy to pay more than the minimum to ensure the debt is cleared before the standard interest rate kicks in.

Understand What You’re Entering

Balance transfer offers often appear enticing at first. However, it’s essential to scrutinize the fine print and grasp the terms before signing up.

Typically, balance transfers incur a fee, usually a percentage of the amount moved. Compare this cost against your current monthly interest to verify potential savings in the long run.

Also, confirm that the card doesn’t retroactively charge interest. Some cards start applying interest to the remaining balance after the introductory period, potentially resulting in unexpected charges if the entire amount isn’t paid off in time.

Lastly, check the interest rate for new purchases, as it may differ from the low or zero-interest rate of the balance transfer. You don’t want to accumulate debt unknowingly on new purchases.

Keep Your Other Cards Open

To tackle credit card debt effectively, avoid incurring new charges post-transfer. You might be tempted to close other credit accounts, but keeping them open is better for your credit score.

“The length of your credit history impacts your score, and having available credit demonstrates that you’re not maxing out your cards, which boosts your score,” Woroch advises.

If you’re worried about the urge to use those cards, consider leaving them at home or cutting them up. Make sure you haven’t saved your card information for easy online purchases. Reducing these conveniences lowers the risk of accumulating debt, according to Woroch.

Using credit card balance transfers has its advantages and disadvantages, so thorough research is vital before committing.