Pros and cons of balance transfer credit cards to pay off debt
43% of those who carry credit card balances do not know their interest rate
The Consumer Financial Protection Bureau (CFPB) says a balance transfer allows consumers to move an existing credit debt from a high-interest account to either a zero-percent card or a card with a much lower interest rate, sometimes for a fee.
Nathan Grant, a senior finance industry analyst with MoneyTips, said it ultimately helps chip away at the balance, even if the offer is for a limited time.
“So when it comes to using balance transfers, it’s going to help you pay a lot less in interest overall,” Grant said. “It is going to speed up the repayment process and you really want to just know exactly how it works.”
Grant said there are two things to consider:
There’s typically a balance transfer fee: anywhere from three to five percent of the balance that is moving to the new card. Use an online balance transfer calculator to make sure it’s a good deal.
Debt cannot be moved within the same institution: borrowers must move balances to a different bank. For example, debt cannot be moved from one Chase card to another Chase card.
“What I recommend is looking at the promotional period, let’s say you get approved for a year, look at your remaining balance that you transferred over, divide that up by the number of months that, you know the promotional period’s going to be in,” Grant advised. “See if that’s something you can manage in your budget, because if you can, then you can kind of set it and forget it.”
Grant said the strategy is to either pay off or pay down as much as possible during the promotional period before the regular interest rate kicks in.
He said everyone’s situation is different. Consumers can talk to a local banker, credit union, or financial advisor to figure out if a balance transfer is a good option for them.
Copyright 2023 Gray Media Group, Inc. All rights reserved.