Pros and Cons of Refinancing Your Debt Using a Balance Transfer Credit Card
“What are the pros and cons of refinancing your debt using a balance transfer credit card?”
Having high-interest credit card can make it extremely difficult for you to escape Broke Phi Broke. One way to solve this problem is to refinance your credit card debt by using a balance transfer credit card.
Once your debt is transferred, you can potentially save hundreds of dollars on interest, which allows you to pay off your debt sooner rather than later.
When using this debt payoff strategy, there are certain pros and cons of refinancing your debt using a balance transfer credit card you should be mindful of. We’ll discuss the pros first and then move on to the cons.
Afterwards, we will discuss some ways that you can maximize the benefits of using this strategy.
The Pros of Using a Balance Transfer Credit Card
Allows you to Ditch Current Card Provider
While you can try to ask your current credit card provider to lower the interest rate on your account, some institutions may not be willing to do so. Even if they lower your interest rate, it may still be on the high side.
Using a balance transfer helps you escape unfavorable credit card interest rates and fees.
Save a Lot of Money on Interest
“Choosing a balance transfer credit card with a 3% balance transfer fee would result in paying $150 instead of the $610 in interest if used properly.”
According to WalletHub, the average credit card interest rate is 19.24%. Let’s say that you had a credit card with this interest rate and a $5,000 balance and wanted to pay it off within 15 months, how much interest would you pay?
Having trouble calculating the answer? No problem, we can use Card Ratings monthly payment tool to come up with a solution. After plugging in the variables given above (19.24% interest; $5,000 balance; 15 month payment length), it tells us that we need to pay $374 per month to get rid of the debt.
To find out how much interest we’ll pay during this time period, we first have to multiply $374 * 15 to get the total amount paid towards the loan, which ends up being $5,610.
So, using this payoff plan we end up paying $610 in interest over a 15 month period. But what if we used a credit card balance transfer instead?
If we used a balance transfer, we could avoid paying that amount, but we still have to take into account balance transfer fees, which range from 3-5%.
Choosing a balance transfer credit card with a 3% balance transfer fee would result in paying $150 instead of the $610 in interest if used properly.
*In the last section, I’ll recommend a card that has a $0 introductory transfer fee, so keep reading!*
For now, let’s move on to discussing the last pro of using a balance transfer credit card!
Potentially Consolidate Your Credit Card Debt by Placing it On One Card
Do you sometimes feel overwhelmed when trying to keep up with multiple credit cards? To solve this problem and simplify your financial life, it might benefit you to transfer all of your credit card debt to one card.
By doing this, you don’t have to worry about forgetting to setup a payment if you’re making manual payments monthly.
It simplifies your financial life and frees time up for you to focus on more important things.
*Keep in mind that you cannot transfer a card issued by one bank to that same bank. For example, if you have a Citibank credit card, you cannot transfer the balance to another Citibank credit card. You’ll have to transfer it to a Chase card or some other bank.*
The Cons of Using a Balance Transfer Credit Card
Balance Transfer Fee
As mentioned above, balance transfer fees range from 3-5%. In personal finance, the goal is usually to minimize fees whenever possible.
But in this situation, you have to perform a cost-benefit analysis on your on to see whether this method can save you money.
However, this balance transfer fee can be avoided by choosing the right balance transfer credit card, which we will discuss near the end of this article.
Good to Excellent Credit Score Needed
“According to NerdWallet, a good to excellent score ranges from 690-850.”
To use this debt repayment strategy, you need to qualify for a balance transfer card, which requires a good to excellent credit score.
According to NerdWallet, a good to excellent score ranges from 690-850. For those with poor to average credit, this strategy may not be available to them.
If this is you, focus on improving your credit first. Seek the help of a professional debt counselor if necessary.
Doesn’t Correct Bad Financial Behavior
“You need to change the behavior that got you in debt in the first place or this strategy will never work.” – Brian from Debt Discipline
Although refinancing credit card debt can potentially save you money, it doesn’t change your bad financial behavior. It just delays the repayment of debt for a specific time period.
According to Brian from Debt Discipline, “You need to change the behavior that got you in debt in the first place or this strategy will never work.”
If you continue to rack up debt on another high interest credit card, using a balance transfer card won’t save you that much in interest. Consider seeing a financial therapist to help you find out why you are overspending.
With that being said, there are ways to maximize the benefits of using a balance transfer credit card.
Three Ways to Maximize the Benefits of Using a Balance Transfer Credit Card
Choose the right Balance Transfer Credit Card
When using a balance transfer credit card, it is important that you select the right card. Here are some things to pay close attention to:
- Balance transfer fee amount
- Intro balance transfer APR period
- Annual Fees
Balance Transfer Fee Amount
To minimize the balance transfer fee amount, you should pick the card with the lowest balance transfer fee. Most cards I see have a fee of 3%.
While balance transfer fees range from 3-5 %, there is one card you can select that has an introductory rate of 0%. This card is the Chase Slate Card, which has an introductory balance transfer fee of $0 for 60 days after you open the account.
Intro Balance Transfer APR Period
The intro balance transfer APR Period is something you must pay attention to if you want to avoid paying high interest rates when using a balance transfer card.
Balance transfer APR periods typically range from 12-21 months. It is paramount that you select a card that has a time period that you are most comfortable paying the credit card off in full to avoid interest payments.
Citicard usually has cards that offer the longest payback period, which is 21 months.
Annual fees on balance transfer fees should be avoided at all cost. While I did not encounter any balance transfer cards that had annual fees, you should make sure the card you select doesn’t have any before moving forward with the credit card application process.
After you get approved for the card, you’ll want to create a solid repayment plan.
Creating a Solid Repayment Plan for Your Balance Transfer Credit Card
To maximize the benefits of using a balance transfer credit card, you should create a solid repayment plan.
In order to create this plan, you need to know when your intro balance transfer APR expires. When you have this information, divide the total balance on the card by it.
For example, if you have a card with an intro balance transfer APR length of 15 months and a balance of $5,000, your formula should look like this: 5000/15 = 333.33.
$333.33 is the amount you should pay monthly to avoid interest. It is in your best interest to setup an automatic monthly payment of this amount to avoid paying interest.
Do Not Use the Card for Purchases
When using a balance transfer credit card, do not use the card for any purchases. Do. Not. Use. The. Card. For. Any. Purchases. If you have to, cut up the card and do not add it to any mobile payment app.
Using the card for purchases increases the amount you have to pay towards the credit card each month. It is not a smart financial move.
Is Using a Balance Transfer Credit Card Right for You?
Using a balance transfer credit card can save you a lot of money if used properly. For those who have good to excellent credit, it is a good strategy to use.
Before deciding whether to pursue this strategy, you should ask yourself:
- Am I prepared to confront the root cause of my overspending issues?
- Do I have the discipline to pay the balance off in full before the intro balance transfer APR period ends?
If the answer to those questions is yes, then move forward with applying for a balance transfer credit card. Consider other alternatives like debt counseling or taking out a personal loan to refinance your debt if the answer is no.
After learning about the pros and cons of refinancing your debt using a balance transfer credit card, does this sound like a strategy that would work for you?
Have you used a balance transfer credit card before? Let me know the answer to those questions in the comments section!
Jerry is a Business Insider Contributing Writer who is obsessed with personal finance. He believes you can improve your financial situation by applying principles taught by the financial independence community to your financial life.
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