3 risks of relying on balance transfer credit cards

Credit cards can help with improving your credit and can provide spending power to consumers. But if you find yourself in a spot where you’ve racked up a balance and can’t pay it off quickly, a balance transfer credit card could give you some breathing room.

Balance transfer credit cards offer a low or even 0% APR promotion, which can make it easier to pay down your credit card debt and save money along the way. Credible can give you a full breakdown of balance transfer credit cards and what offers are currently available.

A balance transfer card could potentially save you hundreds of dollars as you pay down debt — but it doesn't come without risks. Before applying, it’s crucial to get a full view of the cards.

What are some balance transfer concerns?

While balance transfer credit cards provide some clear benefits to people with credit card debt, it’s important to also understand the drawbacks. There are at least three major issues.

1. It impacts your credit
2. Most cards charge balance transfer fees
3. It doesn’t solve the core problem

Issue 1: It impacts your credit

Virtually every time you apply for a new credit card, the card issuer will run a hard inquiry on your credit report, which can temporarily decrease your credit score by a few points.

Also, if you transfer a balance from a card with a higher credit limit to a balance transfer card with a lower one, the change in the credit utilization ratio—the percentage of your credit limit that you’re using—can end up hurting your credit, at least until you pay it off.

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Issue 2: Most cards charge balance transfer fees

There are some exceptions, but most balance transfer credit cards charge a balance transfer fee, which typically ranges from 3% to 5% of the transfer amount. So, if you transfer $5,000 from one card to another, the card issuer would typically add between $150 and $250 to your balance.

Of course, the interest savings could still outweigh the cost of the upfront fee. But if you transfer a balance and don’t work to pay it off quickly, the interest savings may not be enough to make it worth it.

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Issue 3: It doesn’t solve the core problem

If you’ve struggled with overspending on your credit cards, using a balance transfer card won’t resolve the overspending issue.

If you do add more debt through purchases, it could only make things worse. “You don't want to be incurring new debt, and perhaps interest charges, while you're paying down your old debt,” said Jason Steele, credit card expert for Money.com.

To combat this threat, consider reducing or even eliminating your credit card spending while paying down a balance transfer. Also, avoid making new purchases on the balance transfer card until you’ve paid down the transfer.

“Any payments made above your minimum payment will go to your highest interest rate balance first,” added Steele. “So if you have new purchases that incur interest, any payment above the minimum will go there first, making it harder to pay down the balance that you transferred.”

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What are the benefits of a balance transfer?

The primary advantage of a balance transfer card is the introduction period. In many cases, you’ll pay no interest on a balance transferred from another card for a year or more.

To give you an idea of how much you could save, let’s say you have $5,000 on a card with a 20% interest rate. If you were to create a plan to pay off the balance within 15 months, it would require a $379.49 monthly payment, and you’d pay $692.35 in interest.

If, however, you were to move the balance to a balance transfer card with a 15-month 0% APR promotion and no balance transfer fee, your monthly payment would be $333.33, and you’d pay no interest at all.

When to consider a personal loan for debt consolidation

In some cases, it may make more sense to use a personal loan to consolidate your credit card debt instead of a balance transfer card.

Personal loans don’t come with introductory 0% APR promotions, but they do provide a set repayment term, which you won’t get with a credit card. This means you’ll know exactly when you’ll be debt-free, and you don’t have to worry about losing motivation and making just the minimum payment on a credit card.

Also, a personal loan provides a lower interest rate, on average, than credit cards, which may be a benefit after the intro APR period ends.

Finally, personal loan amounts can vary depending on the lender and your credit and financial situation. But you may have a better chance of getting a higher loan amount. “You may be able to get a debt consolidation loan that will cover all of your outstanding balances, while a balance transfer credit card may not,” said Steele.

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Also, use an online personal loan calculator to run the numbers to make sure it’s the right fit for you.