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personal debt Sep 25, 2019


This topic was requested in my Facebook group (you can join here).  People wanted to know if a balance transfer was worth it.  If you read my blog, you know I am not a huge fan of credit cards, but they could be a useful tool on your financial journey.  I will attempt to breakdown some of the pros and cons of doing a balance transfer.

What is it?
A balance transfer is when you take a high-interest credit card balance and transfer it to a lower interest rate card.  Most of the time, you will be able to find a 0% interest rate special to transfer the balance, but we'll talk more about that later.  It could be a beneficial strategy for those that have a lot of credit card debt.  Let's dive into the Pros!

Low or no interest for a set amount of time 
Interest is what makes it so hard to dig out of credit card debt, especially when the national average rate is 12.77%.  I have seen cards with interest rates at almost 30%!  Balance transfers allow you to take advantage of a lower rate to make paying down debt easier.  Trust me, every little bit helps!

Possibility to have better terms
Sometimes, switching cards can open you up to perks that your current card doesn't have.  If you have a card with no points or miles, you can transfer your balance to a card that does.  However, it doesn't just end there!  There could be a card with a better payment grace period or lower fees.  Always read the paperwork to see if you are really getting a good deal or not.

Consolidating your debt is combining little pieces of debt to make one or two more significant pieces of debt.  For some people, it is easier to keep up with one payment than to have a bunch of small payments.  A balance transfer can allow you to move all your credit card balances under one (metaphorical) umbrella.  Make sure that if you use this strategy, you open a card with a high enough limit to accommodate the consolidation. 

Low or no interest rate for a SET AMOUNT OF TIME
I know you are probably like, didn't she say this under the pro section? Why, yes, yes I did, but this can also be a con.  This time I capitalized the critical piece to that sentence.  You typically only have a set amount of time to pay off the debt with that special interest rate before it goes to the regular interest rate.  When your time is up, most companies go all the way back to when the transfer happened and charge that higher interest rate on your balance.  This could be detrimental to your financial journey!  Here you are thinking you are giving yourself a leg up and, BAM, back to where you started or worse!  Pay attention to the terms and make sure you can pay it off in full before the end of the terms.

A hit to your credit score
There are a few reasons why this happens.  If you didn't read my credit series, this might be a good time for a refresher (Read part 1 here).  New inquiries on your report cause your score to go down.  Closing credit cards cause your score to go down (if you choose to go the consolidation route).  Higher credit utilization makes your score go down (if you move to a card with a low amount of available credit).  So, a balance transfer could hurt you temporarily.  The good news is if you have on-time payments and pay the balance off quickly, you can get your score back up in a relatively short amount of time.  Of course, this will not help the new inquiry.  Only time will heal that (2 years to be exact).

More debt available to you
You have a new card.  That means you also have a new credit limit.  If you choose not to close your previous cards, more credit is now available to you.  With this comes a lot of responsibility!  Try not to put yourself in a position where you use that new balance transfer card to rack up more debt.  It will make you start working against yourself.  Use the balance transfer only for the current balances and pay it off ASAP.

Fees can add up
This goes back to reading and understanding the terms.  Most cards charge a balance transfer fee.  Make sure this fee is reasonable for what you are trying to do.  Break out the calculator or reach out to me if you need help determining if the fees outweigh the benefits.  Sometimes, a balance transfer may not be worth it, considering the costs alone.  Do your homework!

Ultimately, making the decision to do a balance transfer is up to your particular situation and beliefs.  I hope I have provided enough information for you to make an educated decision on how to move forward.  Have you completed a balance transfer before?  Have a horror or success story?  Please let me know below!  I want to hear how it goes!

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