Balance transfers allow you to transfer the balance from one credit card to another. Credit card companies are fond of offering low-interest balance transfers to new and existing cardholders in the hope that they will be enticed to open an account or increase a balance. Transferring balances can give some people a false sense of security, but for others, a balance transfer is a wise move.
Reducing Payments
Transfer offers typically include interest rates as low as 0 percent for a promotional period, which is usually six to 12 months. You might be able to transfer a large credit card balance to a new or existing card at a much lower interest rate than you are currently carrying so you save money on interest and potentially pay off your debt faster.
Extend Time for Repayment
You might have taken on credit card debt assuming you could pay it off within a certain time period, Then, due to unexpected circumstances, you were unable to do so. This leaves you paying interest for longer than you planned, making it even harder to pay off the debt. In this case, transferring your balance to a lower-interest card can allow you to pay off the debt later than you intended but without incurring hefty interest charges.
Peace of Mind
The stress of credit card debt can prevent some people from focusing on the activities that will help them pay off their debt, such as taking on additional work. For these people, the peace of mind that comes from being able to extend credit card payments can be well worth the upfront cost of a balance transfer. Particularly if you have a large balance and a high interest rate, an extra six months with low or no interest could improve your ability to pay off credit cards in full.
Balance Transfer Fees
Most companies require upfront payment of a transfer fee when you choose to transfer a balance from one card to another. These fees are generally in the range of 1 percent to 5 percent and might not have a maximum. Review the terms of any balance transfer offers carefully and determine whether the interest savings or other benefits you will achieve overcome the cost of the transfer.
Increasing Debt
Many people succumb to the temptation of a balance transfer yet end up unable to pay off the balance during the promotional term. Should this happen to you, the unpaid portion of your transferred balance will be subject to standard interest rates, which can be as much as 20 percent or more. This rate might be higher than the rate you originally carried on the balance and could result in increased rather than decreased debt over time.
Impact on Credit
You might be tempted to repeatedly open new credit card accounts so you can take advantage of multiple balance transfer offers and keep transferring your balances from card to card. Keep in mind that opening an excessive number of credit accounts in a short time period can negatively impact your credit.
Defaulting
The terms of a balance transfer might specify that making a monthly payment late even once may put you in default. If this happens, you can lose the promotional rate for your balance transfer before the term has ended and be subject to a high standard interest rate. The credit card company might even have the right to charge increased interest retroactive to when you first made the transfer.
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