Credit Card Balance Transfers - Pros and Cons
An Interest-Free Transfer Can Reduce Debt
Jun 19, 2009
Card providers use interest-free credit card balance transfers to attract new custom. They bank on the fact that customers will develop new credit card debt and pay late fees. The April 2009 Nilson Report stated that the median outstanding credit card debt for households with a card was $10,679 in late 2008. However, a properly managed charge card is an effective way to reduce debt due to the lower interest payments on the outstanding balance.
Advantages of Credit Card Balance Transfers
- Interest-free period. An interest-free credit card balance transfer can save money. For example, a customer with a $5,000 balance at 17% APR stands to save $850 per annum.
- Reduce debt. A low or interest-free period means that a higher percentage of a monthly repayment goes towards clearing the outstanding balance.
- Inexpensive borrowing. It is possible to perform a succession of transfers in order to minimise interest payments. If managed properly, this could prove cheaper than a personal loan.
- Unsecured debt. Credit card debt isn't secured against a property or car so the lender doesn't have collateral. This means that if an interest-free credit card balance transfer fails to reduce debt, an alternative debt solution can be pursued.
Disadvantages of Credit Card Balance Transfers
- New lines of credit. Whilst customers normally arrange an interest-free transfer to reduce debt, it can have completely the opposite effect. Leaving existing lines of credit open can encourage spending and result in additional credit card debt. According to the Nilson Report in April 2009, about 91.1 million American citizens had more than one card.
- Bad credit rating. An interest-free credit card balance transfer is only available to those who haven't missed or made late payments on credit agreements.
- Transfer fee. Most card providers will charge a fee of about 3% of the balance transfer amount or a flat fee. This will be added to the amount owed which means that it will take a minimum of 2 months before a customer is able to save money on interest payments.
- Introductory rate ends. Customers perform a transfer without looking at the T&C's. Once the introductory rates ends, it is common for the APR to be higher than prior to the transfer.
An interest-free credit card balance transfer is a perfect way to reduce debt. This is because a higher percentage of the monthly payment goes towards clearing the balance rather than just paying interest. It is important to close down existing charge cards once the transfer is complete in order to avoid the temptation to create new credit card debt.
Readers that found this article useful may also be interested in identifying the best credit card deal, discovering how effective credit card debt settlement is or finding out how to avoid identity theft.
Sources
Nilson Report - April 2009
Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.
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