Credit Cards

A balance transfer could backfire in this situation

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Do not accept a balance transfer if this could happen to you.

Key points

  • Balance transfers allow you to lower the interest rate on credit card debt.
  • You can transfer the balance of the current cards to a new card with an introductory rate of 0%.
  • This can save you money, but only if you get your spending under control.

If you currently have credit card debt that you’re trying to pay off, it may be worth thinking about doing a balance transfer. Suze Orman recommends this approach as a method to help pay off debt, as do many other financial experts.

Balance transfer offers come from credit card companies. Sometimes you’ll need to open a new card to take advantage of one, and in other circumstances your current card issuer will offer you one. In general, these offers allow you to transfer the balance of an existing credit card for a small fee of about 3%. Then, you are charged 0% interest on the transferred balance for a period of 12 months.

Since credit card interest rates tend to be very high, taking advantage of a balance transfer offer can make paying down debt much cheaper and easier. Since none of your payments will go toward interest while the 0% rate is in effect, you can pay off your principal faster as every dollar goes toward reducing your debt.

But while this can be a great way to progress toward becoming debt-free, there is a situation where a balance transfer could backfire and leave you in a much worse situation.

You should avoid a balance transfer in this situation

A balance transfer could end up being a big mistake for you if you transfer existing debt without first taking control of your spending.

You see, when you open a new balance transfer card and transfer your current card balance to it, this has the effect of freeing up credit on your old credit cards. And if you don’t have good control over your spending, there’s a good chance you’ll end up using those cards again for purchases you can’t afford.

If this happens, you could end up with a large credit card balance on your existing credit cards before you know it, and you’d also have to pay off the balance transfer card. And you could find yourself in much more debt.

Say, for example, you had two credit cards and owed $2,000 on each, and then you transferred both balances. You now owe $4,000 plus the balance transfer fee on the new card you opened. If you ended up charging another $2,000 on each of the cards you previously had balances on, you would find yourself with more than $8,000 in debt on all three credit cards.

How can you avoid making this balance transfer mistake?

To avoid finding yourself in a really bad spot after a balance transfer, you’ll want to make sure you have a budget that allows you to live within your means and that you can reliably stick to. You’ll also want to make sure you can cover your costs without taking on more debt, even once you start making payments on your balance transfer.

If you’re sure you won’t reload your old cards and you have a plan to pay off your balance transfer card, then you can go ahead with a balance transfer and hopefully improve your financial situation. But if that’s not your situation yet, you probably want to get a better handle on your financial life before trying this approach to debt settlement.

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