Pros and Cons of Credit Cards with Balance Transfer – Forbes Advisor
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Credit cards with balance transfer hold promise for those struggling with debt.
For some, a zero percent balance transfer can reduce years of debt repayment and save thousands of dollars in interest payments. For others, however, a balance transfer can, like a yo-yo diet, ultimately lead to even more debt.
Therefore, before applying for a zero percent balance transfer credit card, consider the following pros and cons to determine if a balance transfer is right for you.
Benefits of a zero percent balance transfer
The first and foremost benefit of a zero percent balance transfer credit card is the 0% annual interest rate offer. In some 21-month cases, the 0% introductory APR allows consumers to go into debt without paying interest. The result is that all of your monthly payment goes to pay off the credit card balance.
Let’s look at an example. We will assume that a consumer has $ 2,000 in credit card debt at an interest rate of 13%. While the minimum payment will vary from card to card, a typical minimum payment will be approximately 2% of the outstanding balance. In our example, the minimum payment for the first month would be around $ 40. Of that amount, more than $ 21 would go to interest payments.
Continue to pay only the minimum payment each month, and interest payments increase exponentially. According to this Discount rate calculator, it would take 179 months and interest payments of $ 1,813.37 to pay off this debt.
Transfer that balance to a card with a zero percent introductory APR and the picture changes dramatically. With a 21-month 0% balance transfer card, for example, you could pay off that debt entirely without interest by making monthly payments of less than $ 100.
A second benefit of a balance transfer card is consolidating your existing debt. If a consumer carries balances on multiple cards, merging the balances onto a single balance transfer credit card will eliminate the inconvenience of making multiple monthly payments.
Less use of credit
A third potential benefit is the long-term improvement in a consumer’s credit rating. While a balance transfer can negatively affect your credit score in the short term, as we will see below, over time a balance transfer can increase your score, depending on Experiential.
This is because a balance transfer will likely decrease your utilization rate. The utilization rate compares your outstanding amounts on revolving credits such as credit card to your available credit. Credit scores see a lower utilization rate as a sign of responsible use of credit. A lower usage rate also shows that a consumer has credit to use in an emergency.
With a balance transfer, your total credit increases by the amount of credit on the new balance transfer card. Assuming you are no longer in debt, your utilization rate will go down. While this is not in itself a rationale for transferring a balance, it is a potential long-term benefit. You can read Forbes’ list of the best balance transfer credit cards here.
Disadvantages of a balance transfer
There is no free meal. While balance transfer credit cards offer some benefits, they also come with potential risks and costs.
Balance transfer fees
First, most cards charge a balance transfer fee. The fees are expressed as a percentage of the amount transferred. Three percent is the most common, but the fees range from 0% to 5% or more.
A second risk is the regular APR of the new card. If the debt is not fully paid before the 0% introductory APR expires, the remaining debt will be subject to the card’s regular APR. For many cards, the actual APR will vary depending on the creditworthiness of the applicant. Therefore, be sure to reduce the majority of the debt while using the introductory APR rate. If you can’t pay off your debt during this time, compare the new APR with the APR of the card you are transferring your debt from. If the new rate is higher, it could undo any progress you made in reducing your debt during the 0% introductory period.
A third problem concerns credit limits. Even though a consumer may have $ 10,000 in high-interest debt, for example, that doesn’t mean the new credit card with balance transfer will offer so much available credit. The amount of credit granted depends on several factors and varies from one issuer to another. So be prepared to transfer only a portion of your debt to the new card or request multiple balance transfer cards.
Asking for multiple cards brings us to a fourth potential pitfall. While we noted above that a balance transfer card can improve your credit score in the long term, it can hurt it in the short term. This is because credit scoring formulas take into account a consumer’s recent demand for new credit. While one new credit card application probably won’t reduce a score significantly, applying for multiple new lines of credit can. More importantly, if you are shopping for a mortgage in the near future, even a drop of a few points can result in a higher mortgage rate.
Excellent credit required
Fifth, only “applicants with excellent credit will be eligible for introductory credit card offers like zero percent balance transfer,” according to Discover Bank. This is not so much a downside to balance transfer cards as it is a warning. The best 0% balance transfer deals go to those with a credit score near or above 700.
Risk of more debt
Finally, a consumer runs the risk of becoming more indebted on their credit cards once the interest burden decreases. They may end up with more debt than at the start. After transferring your balance to a new credit card, you suddenly have no more credit available. It can be a temptation for some to keep spending and getting into more debt. Here the wisdom of Socrates comes to mind, “know thyself”.
Ultimately, a zero percent balance transfer makes sense if the majority of your debt can be paid off by the end of the card’s promotional period, the new APR after the promotional period does not compensate for progress and fees. balance transfer can be avoided or comfortably. covered.