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Using a Balance Transfer to Consolidate Debt

Using a Balance Transfer to Consolidate Debt
Daniel Cohen
UpdatedAug 22, 2020
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    6 min read
Key Takeaways:
  • The best balance transfer offers require you to have excellent credit.
  • Balance transfers are a good debt consolidation option if you pay down the debt when your rate is low.
  • Pay attention to any fees, how long the low rate lasts, and your rate after it resets.

Is a Balance Transfer a Good Way to Consolidate Debt?

A balance transfer can be a smart way to consolidate debt. You could reduce your total costs to pay off your debts while replacing multiple bills with only one. It is not the right solution for everyone who has debt, but a balance transfer is an ideal choice if you have high interest credit cards, excellent credit and can make substantial monthly payments, on time, during the low interest rate period.

How a Balance Transfer Works

A balance transfer is similar to a debt consolidation loan. You take balances from existing debts and move them to a new credit card. The balances you transfer to the new card will have a 0% or low interest rate. The low, introuductory rate lasts for a specified number of months depending on the offer. It is common to find balance transfer offers with 12 months with the low rate, but you can also find offers with 15-month and 21-month introductory rate periods. Your low rate applies only to the balances you transfer. Any charges you make on the card are charged at a higher rate.

When you apply for the balance transfer, the creditor pays close attention to your credit score. The creditor decides whether to offer you an account and what size credit limit you get. You can transfer any amount up to the credit limit you receive. If you are given a small credit limit and can’t transfer a significant amount of debt, then the benefit of doing a transfer drops.

It doesn’t take long for a creditor to decide if you qualify for the offer. You can expect the process to take two weeks or less. How many different accounts you are consolidating affects the timing. If any of the debts you are transferring has a due date within two weeks, you may need to make a minimum payment on the account. This will protect you from a late fee if the due date arrives and your new creditor has yet to transfer the funds to pay off the account.

The Benefits of a Balance Transfer

Saving money is the best reason for you to use a balance transfer to consolidate debt. When you reduce your interest rates significantly and end up with a low or 0% rate, a larger amount or all of your payment will go to your principal balance. You will pay off your debt faster and at a reduced cost. The higher your interest rate on your existing balances, the greater the savings a balance transfer can deliver.

You don’t need to pay off all your debt before the low interest rate period ends for a balance transfer to help you. You can still save money with a balance transfer if you make good progress on paying down your balance when the low rate is in effect.

A balance transfer also makes managing your finances easier, as you replace multiple debts and due dates with one.

Balance Transfer or a Personal Debt Consolidation Loan?

Though a balance transfer consolidates debt like a personal loan, there are key differences. No personal loan is going to come with 0% interest rate. The balance transfer rate is temporary, but it is the lowest interest rate available.

A debt consolidation loan has a fixed monthly payment that pays off the debt after 3-5 years. The exact required payment and length of the loan term are specified on the loan agreement. A balance transfer permits you to make a very small monthly payment. The benefit of that is greater flexibility if an emergency or sudden need for money arises.. You don’t want to make minimum payments after doing a balance transfer, but you can make a small payment and remain in good standing.

When is a Balance Transfer Not a Good Idea?

It is possible to do a balance transfer, never be late on a payment and end up in a worse situation than if you didn’t do the transfer. Here are three times when taking a balance transfer you qualify for is not good.

  1. Fee for nothing- Many balance transfers come with a fee, ranging from 3% to 5% of the balances you transfer. If you pay a fee and then make small payments each month, then a balance transfer wasn’t the right solution.
  2. Bye, bye rate- You miss payment dates at times Never pay late when you do a balance transfer. If you do, your low rate disappears.
  3. Not seeing the big picture- Understand how the balance transfer fits into your overall financial situation. Too many people run up new debt on the cards they pay off in the transfer creating a bigger debt problem down the road.

Balance Transfer Key Features

You should shop around for the best balance transfer offer you can find. Shopping around is a “best practice” for any financial product or service.

A balancw transfer has three main features to compare:

  1. The interest rate- The most attractive balance transfer offers on the market have a 0% rate.
  2. Length- How long the rate stays in place before adjusting to a new rate. There are cards that make the 0% available for as long as 21 months.
  3. The fee- Many cards charge a fee equal to 3%-5% of the balance(s) you transfer, but there are cards that charge no fee at all.

Try to get a card that combines no fee, 0% interest and a long time-period at the 0% rate. Your goal is to pay off debt. Don’t throw money away on fees, if you don’t have to. If you pay a fee of 3%-5% and trasfer $10,000, your fee will be $300-$500. It is your responsibility to take the time to find the best deal and not settle for the first one you see.

Not All Debts Can Be Transferred

If you are trying to transfer balances from a student loan, auto loan, HELOC or anything other than other credit card balances, shopping around is even more important. Creditors don't have idential rule for accepting these kinds of accounts, so be prepared to contact a number of creditors to find one willing to include your non-credit card debt in the transfer. Raise the issue right away, if it isn't worthwhile doing a balance transfer unless it includes the account(s).

Creditors won't let you transfer a balance from an account you currently have with them. For example, if you want to transfer a high interest Chase credit card, you can't take advantage of  a 0% for 21-months Chase balance transfer offer. 

Accounts with small balances are not eligible for transfer. Minimum balances vary from $100 to $300,depending on the creditor.

Is Debt Consolidation With a Balance Transfer Right for You?

A balance transfer may a good solution if you have:

  • Strong credit score.
  • Enough credit offered to transfer a significant dollar amount.
  • Debt that is eligible to be transfered.
  • The ability to pay down the debt significantly during the low-interest period.
  • A solid commitment to not running up new debt.
  • The time to shop around for the best balance transfer offer.