Pros and Cons of Consolidating Debt with a Balance Transfer

Too much credit card debt? Too many payments each month with not enough to show for it?

Sounds like something needs to change. For many people struggling with an overwhelming number of debts, consolidation can be a very helpful tool. But debt consolidation comes in many forms, and one of the more interesting is the balance transfer.

In a balance transfer, you use one credit card to pay off the balance on one or more other credit cards. In this way, you can roll multiple debts into one debt. If you've got an account with an especially low interest rate, this can be a way to save some serious money, but is it right for you? Here are a few things to keep in mind as you weigh your options:

Pros of consolidating debt with a balance transfer

Low interest rates are available

Lots of credit card companies are looking to entice new borrowers by offering great introductory offers, including low (or even no) interest for the first few months after the account is opened.

If you've got a great credit, you may be able to open a new account with significantly better terms than your existing cards. As a consumer, it's always in your best interests to shop around and see who's willing to give you the best rates.

Flexible repayment

Since you’re transferring your debts to a new credit card and not a loan, there won’t be a fixed monthly payment. As long as you cover the minimum due each month you’ll be fine paying however much you can afford that month.

Savings can be big if you plan correctly

Even a temporary 0% APR card can save you a ton in interest charges, as long as you take full advantage of that introductory period and commit to paying down your debt. If you're in a position where you can focus on paying down your debts quickly, a balance transfer with a great rate can really help you make significant progress on your debt.

Cons of consolidating debt with a balance transfer

Low rates are usually temporary

The best credit card interest rates are usually just introductory rates – meaning they don’t last. Things may be great while those rates are in effect, but what happens when the introductory period is over?

If you don’t pay off the debt before the end of the introductory period, you might be in trouble, especially if the default rate is higher than what you were paying before or the introductory offer included deferred interest.

There are transfer fees

It usually costs money to transfer a balance onto a new card. Typically, a balance transfer fee will cost you 3-5% of the balance being transferred. A 5% balance transfer fee on a $2,000 debt would cost you $100, for example.

Depending on the new rate, that might be an acceptable amount to pay. But if the savings aren't more than what you're paying in a transfer fee, then that particular offer isn't right for you.

It can be a temporary fix to a long-term problem

Transferring your balances to a card with great terms can help you save money, but only if you have a clear, committed plan. If you fall into the trap of just paying the minimum or even continuing to transfer your debts to other cards, you may never make any actual progress.

Quite a few people use balance transfers repeatedly in order to defer payments and put off the inevitable. While there's nothing wrong with wanting some breathing room in your budget, jumping from card to card to card isn't a viable strategy for most people. You're better off finding a solution that helps you make real progress on your debts and not just temporary peace and quiet.

Weighing your debt repayment options? MMI offers free online financial analysis to help you decide the best way to deal with your debts. Simply enter your debts and basic budget information and we'll point you toward the options that work best for your situation.