A balance transfer is a great way to get out of debt. Many Americans use it and you could too, especially if you’re in financial trouble. However, if you’re not careful and if you don’t act responsible, a balance transfer can also work against you and turn a bad situation into one that’s even worse. This article will show you the pros and cons of balance transfers, to help you decide if you want to use this method to get out of debt or not.
How does a balance transfer work?
Before getting into the pros and cons, we first have to talk about how balance transfers work. Let’s say you’ve racked up debt on a high-interest credit card and you are now unable to make the monthly payments. You can transfer all or part of the debt that you owe to another credit card, with 0% interest.
Many credit card companies offer 0% interest on credit cards for a limited period of time, such as the first 12 months. If you have a good credit score, you can easily get one such credit card. Afterwards, you can start to pay off what you owe. But, remember, you have to pay everything within that 12- month period with the 0% interest. Otherwise, you’ll get back right where you started from.
You can save money
Paying less interest will definitely save you money. But you still have to be a responsible spender. Just because you now have some extra money in your pocket, it doesn’t mean that you have to throw it away on things that you don’t need.
You can get out of debt faster
Probably the most important benefit of balance transfer, paying off your credit card debt will not only free you from that horrible burden, but also help you improve your credit score.
You expose yourself to even more debt
If you’re unable to pay off that high-interest credit card, you might want to think about closing it after you transfer what you owe to another card. This way, you won’t be tempted to use it. To really get out of debt, you have to change your spending habits. It’s not enough just using a balance transfer or any other ways to save money.
There is one exception here that you need to take into account. If you also want to apply for a mortgage in the near future, you shouldn’t close that high-interest credit card, as this will affect your credit score.
That promotional APR is promotional
People often forget that the 0% interest rate on their new credit card is only available for a limited period of time. After that grace period is over, your new credit card will have a new interest rate. That’s why it’s important to pay everything that you owe before that.
It’s all up to you
A balance transfer is just a tool. And every tool is just as good as the one who uses it. If you are committed to getting out of debt, a balance transfer will definitely offer you the help that you need. But, if you’re not, it will end up hurting you.