Are balance transfers legit?
Breaking down who should consider using a balance transfer and why it can be a wildly effective tool in your debt repayment strategy.
“Balance transfer credit cards:
Are they a scam or worth it if you have credit card debt?”
Not a scam!
But, that doesn’t mean it’s a useful tool for everyone.
What is a balance transfer?
A balance transfer is similar in spirit to refinancing your student loans or mortgage. The whole point is moving your debt from its currently high interest rate to a lower one.
You open up a new card, with a 0% APR offer, and use that to pay off your old credit card. Then you pay off the debt at a 0% APR rate on the new card.
Balance transfers offers are actually often 0% APR for a promotional period, e.g. 15 or 18 or 24 months. That means you can move your high-interest credit card debt from something bonkers like 24% APR to 0% APR. Every payment you make is going towards chipping away at the principal balance when your debt is at 0% APR. It’s a huge win!
Why would a bank offer you 0% APR?
Well, the bank is pretty sure you’re going to screw up.
Debt is hugely profitable for banks. They’re willing to make you a tasty offer of 0% APR because the bank is quite certain you’re going to screw up and generate more debt and then they’ll be able to charge you 20+% APR on even more debt. Joke is on them, because you’re going to know the tricks and traps and make a plan to aggressively pay off your debt while it’s at 0% APR!
Balance transfers are good to use if:
You have high interest rate credit card debt.
You don’t struggle with compulsive purchases.
If you even think a new credit card would tempt you to spend more, then don’t do a balance transfer.
The offer is with a bank you don’t currently use. Typically, you need to be a new customer to get a competitive balance transfer deal.
But there are traps to avoid!
NEVER, EVER miss a payment. It could nullify the promo rate and send you right back into high interest debt.
You want to make sure the interest is waived not deferred. If it’s deferred and you don’t pay off the full balance on time, then you could end up still having to pay back all that interest you thought you were going to save. Deferred interest is common with store credit cards. Waived interest means you don’t owe back any interest, even if you still have a balance at the end of your promotional period.
Don’t spend on the balance transfer card. Don’t carry it in your wallet. Don’t link it to your Netflix account. Don’t spend a penny on this card! You only want to use it for the promo rate to pay off your debt and nothing else. Adding purchases to the tally can confuse what is new and needs to be paid off in full and what is your outstanding, rolled over debt.
Hold on, isn’t there a fee?
Why yes, yes there is. Balance transfers usually come with a fee. Oftentimes it’s around 3% of the total balance you’re moving over. That fee typically pales in comparison to the price of continuing to pay off debt at a high interest rate.
Let’s look at an example.
You have $5,000 in credit card debt. You’re being charged 25% APR and the minimum balance due is $155 a month.
If you keep paying the minimum of $155 a month and continue being charged 25% APR, then it will take 53 months and cost you over $3,100 in interest alone to pay off your debt.
Now, let’s say you moved that $5,000 debt to a 0% APR for 15 months balance transfer offer that charged you a 3% fee. That means you’re paying $150 to move over the $5,000 balance. Even if you kept paying just the minimum due of $155, you’d be debt free in 37 months and only pay $824.88 in interest and fees. That’s a huge savings compared to $3,100 in interest alone!
Even better, if you increase your monthly payment to $335 – then you could be debt free in month 15 when the promotional rate is up and only have paid $150 for the balance transfer fee! That’s a savings of almost $3,000.
Want more help building a debt freedom plan? I detail how to utilize a balance transfer and so many other tactics in my first book Broke Millennial.