Thinking Money | Free Financial Advice and Tips

When Does a Balance Transfer Not Make Sense?

Posted on 15. Sep, 2011 in Credit cards

Are you considering transferring all of your credit card debt to one card through a balance transfer? You should be aware that a balance transfer is not always the best option, and can sometimes cost more money that it’s worth. So, how do you know if a balance transfer makes sense for your financial situation?

There are several scenarios that make balances transfers cost more than they’re worth:

Balance transfer fees

This is especially true if you’re transferring a large amount of debt onto a new card and the fee is a percentage of the amount transferred. For instance, transferring a balance of $5,000 with a 3% balance transfer fee would cost $150 – and that’s just the fee to complete the initial transfer. Having a large fee could eat up any potential savings, making a balance transfer a bad idea.

Higher interest rates

If the interest rate on the card you want to transfer your balances to is higher than you’re currently paying, transferring your debt would not be cost effective. While you may be able to consolidate your debt and make payments easier, the convenience is not worth the extra money you’ll be paying.

It’s important to consider the interest rate even if there is an introductory period with no interest charged. If you are planning on paying off the balance within the introductory period and you have the financial means to do so, it’s a good idea to transfer your balance to a card with a zero percent APR introductory offer. However, if you will only be able to make minimum payments on your balance transfer and will still have a high balance once the promotional period is over, a higher interest rate coupled with balance transfer fees will negate the potential positive aspects of a balance transfer.

Losing out on rewards

If you currently have rewards credit cards, and you’re planning on transferring the balances from those cards to a card with no rewards and closing the old accounts, you may want to rethink that decision. While consolidating your debt and getting a lower interest rate are beneficial, you should research whether you can find either a new rewards card that allows balances transfers, or you should research your options for transferring balances to an existing rewards card. You don’t want to close an account that has been earning you rewards and cash back.

Transferring a small amount of debt

While you may think that transferring a small amount of debt will be beneficial because you’ll only being charged a percentage of the amount transferred and can enjoy a low promotional APR, pay attention to the details. There is often a minimum fee charged on a balance transfer, making the trouble not worth any small financial benefit.

If a balance transfer does make sense to you, check out the range of balance transfer credit cards at Finance Choices.