Four Reasons Why Your Credit Card Balance Transfer Might Flop
Updated: Nov 1, 2020
Overwhelmed with credit card debt? You might be considering a balance transfer to gain some semblance of control over your debt.
Say you have a significant amount of debt on one of your credit cards, $10,000 or more. A balance transfer will allow you to transfer that balance to a new credit card account that comes with a promotional 0 percent interest rate on all debts transferred.
You can now pay off that $10,000 balance without worrying about it increasing due to interest charges.
This can be a great way to regain control over your debt. You can whack away at the principal without worrying about it growing exponentially due to daily compounding interest.
If you don’t change your destructive spending habits, a balance transfer won’t really help you and won’t do anything to improve your financial situation.
A balance transfer may even leave you in worse financial shape, especially if you simply run up new debt on your old cards without first paying off the balance transfer debt.
How Balance Transfers Work
With a credit card balance transfer, you move your high-interest-rate credit card debt to a new line of credit that offers an introductory zero percent interest rate. This gives you time to pay off your existing credit card debt without having to worry about high APRs.
This sounds great but there are some potential pitfalls with balance transfers.
Pitfall 1: You Don’t Pay Off Your Old Debt Fast Enough
No credit cards have 0% interest forever. Any new card you open will retain its introductory 0% interest rate for a set period of time, usually 6 to 18 months. That means you will need to pay off the debt you transferred before the 0 percent offer expires.
If you don’t, you’ll immediately be charged your new card’s standard rate APR. That rate could be extremely high – standard APRs can range anywhere from 16.99% to 29.99% or higher – and will immediately cause your existing debt to start accumulating interest if you don’t pay it all off within your next billing cycle.
Moreover, some balance transfers can also carry fine print relating to “deferred interest,” meaning if you don’t completely pay the balance by the end of the promotional period, your balance could accrue retroactive interest charges. That could leave you in even worse financial shape than you were before you transferred your balance and lead to much more debt stress.
To Avoid This Pitfall: Budgeting is key. Too many people transfer their debt and forget about it. Don’t fall victim to an “out-of-sight, out-of-mind” mentality. To make a balance transfer work, you need to properly create a budget—subtracting your monthly household expenses from your take-home pay. From there, you can determine how much extra money you can devote toward paying down your balance. After you’ve evaluated your income and expenses, use them as a guide to determine if you have a reasonable amount of time to pay off the entire balance before the promotion expires.
If you determine that you won’t have enough time? Seek out a balance transfer card with a longer introductory period. It is possible to find cards that give you 0% interest on balance transfers for 18 months. Those extra months can make all the difference in getting that debt eliminated before your 0% interest rate disappears.
Pitfall 2: You Keep Making New Charges
Transferring your debt to a card with 0% interest won’t help if you keep making new charges on your old card.
Too many people continue making charges on their old cards that they can’t afford to pay off in full each month. Then, when the 0% offer on their new card expires, they not only still have that debt, but also the newly established transferred debt. And that new debt comes with whatever high interest rate is attached to their old card. This can leave you worse-off financially than you were before you transferred your debt.
How to Avoid This Pitfall: Avoiding this mistake requires self-control. When you make a balance transfer, commit to not making any additional charges that you can’t afford to pay off in full when your card’s due date arrives. If you’re not ready to make this commitment, transferring your balance to a new card is a waste of time.
Pitfall 3: You Might Not Be Able to Transfer All of Your Debt
Balance transfers come with limitations. Depending on how much debt you have, you might not be able to transfer all of it to a new card. That’s because your new card will come with its own credit limit. If this limit is $10,000 and you have $12,000 of existing debt on your current card, you won’t be able to transfer all of your debt to your new one.
How to Avoid This Pitfall: The better your three-digit credit score, typically the higher the credit limit on your new card will be. Unfortunately, if you have a lot of credit card debt, your score might be lower. And if you have missed or late payments in your recent history, your score will be even weaker.
If you can’t qualify for a card with a higher credit limit, you might have to transfer just part of your existing debt to your new card. You’ll then have to commit to paying off this partial debt on time, before your new card’s 0% offer expires.
This isn’t ideal, and you’ll still have the remaining debt on your old card to pay off. If you stick to a spending budget and devote any extra money to paying down your debts, though, having at least part of your credit card debt at an interest rate of 0% can help you improve your financial health.
Pitfall 4: You Might Not Be Able to Transfer Your Debt to All Cards
There’s another important limitation of balance transfers: You can’t transfer the debt from one bank’s credit card to another credit card offered by that same bank. For example, if you have a Capital One credit card with $4,000 of debt, you can’t transfer that debt to another Capital One-branded credit card, even if you really want to apply for that specific card.
How to Avoid This Pitfall: Fortunately, you’ll have plenty of relief options when you’re ready to complete a balance transfer. When you’re searching for new credit cards, though, don’t target another card offered by your same bank. Instead, look at the many cards – including those offering generous rewards programs in addition to that 0% introductory offer – offered by other banks and financial institutions.
Bottom Line: Balance transfers can certainly prove to be a useful tool that help you regain control over your debt. But remember: Transferring your debt to a card with 0% interest and then forgetting about it isn’t a valid strategy for tackling your debt problems. You need to aggressively pay down that debt before your introductory interest-rate offer expires. If you don’t? You’re just wasting your time, and that transferred debt will continue to loom over your head. In that case, you really are just painting yourself into a corner.