The Pros and Cons of a 0% Balance Transfer

A 0% balance transfer credit card can be a valuable debt reduction tool. However, it can also be a trap.

That’s not a contradiction. As with any tool, the key to making a 0% balance transfer card work is how you use it. The right way to use one of these cards starts with knowing their pros and cons.

[Read: Best 0% APR Credit Cards.]

Pros of 0% Balance Transfer Cards

A 0% balance transfer card works by allowing you to transfer existing credit card balances to a card with no interest charges for a limited period of time. Below are some of the benefits of doing that:

Pay Down Debt Faster by Eliminating Interest Charges

The average interest rate charged on credit cards is over 20%, according to Federal Reserve data.

Eliminating interest charges, even temporarily, allows all of your payments to go directly toward reducing the amount you owe and not interest charges. That can allow you to pay down debt faster and more efficiently.

For example, according to TransUnion, as of November 2024, the average credit card balance was $6,369. At that time, Federal Reserve data showed the average credit card interest rate was 22.8%.

At that interest rate, to pay off that average balance over 18 months, you’d have to pay $421 a month for a total cost of $7,580. Of that amount, $1,211 would be interest charges.

But if you were making those same monthly payments of $421 with a 0% balance transfer card, you could pay down that $6,369 debt in just over 15 months. Or you could still pay off the debt in 18 months but with a lower monthly payment of $354. Either way, the best part is that it wouldn’t cost you anything in interest charges.

Simplify Your Payments by Consolidating Multiple Debts

Not only can a 0% balance transfer card make debt repayment less expensive, but it can also make your life easier.

By consolidating balances from two or more credit cards and transferring them to one balance transfer card, you can turn multiple monthly payments into one. This can save you time and reduce the risk of missed payments.

“Using a 0% card with no balance transfer fee is like a ‘Get out of Jail Free’ card in Monopoly,” says Karen Carlson, vice president of education and digital marketing at InCharge Debt Solutions. “It will buy you time and save you money on other high-interest accounts. Depending on what you transfer over, you can save hundreds of dollars a month on interest.”

[Read: Best Credit Cards.]

Get Debt Repayment on a Schedule

One problem with credit card debt is that it tends to drag on if you’re just making the minimum monthly payments. Since the minimum payments are usually low, it could take a long time to pay off your debt, and because of that, you’ll have to pay more in interest charges.

Usually, 0% balance transfer cards offer a 0% rate for a limited period, such as 12 to 18 months. You can structure your debt repayment around that time period so that you have a clear goal to shoot for. And it can be easy to do since there are no interest charges to calculate.

To figure out the monthly payment needed to pay off your balance before interest charges set in, simply divide the amount of your balance by the length of the 0% interest period.

For example, if you have a $3,000 balance on a card with a 0% interest offer for 12 months, you’d divide $3,000 by 12. So, to pay off the debt during the 0% interest period, you’d need to pay $250 each month.

Cons of 0% Balance Transfer Cards

There are definitely ways that 0% balance transfer cards can help you reduce debt. Still, there are also some potential traps you should be aware of:

Adding Capacity to Borrow Can Get You Into More Debt

Once you’ve transferred your existing credit card balances to the balance transfer card, the credit limits on your old cards will be completely available.

This can be a problem if you have trouble controlling your spending. If you build those balances back up, you can wind up with more debt than when you started.

Carlson warns about the potential for people to add to their debt with a balance transfer card. “Don’t use balance transfer cards as a way to expand your borrowing limit,” she says. “The worst thing you can do is transfer maxed-out accounts to a 0% card and then re-max them out again. You should only use these to reduce your overall debt, not increase it.”

This is an especially big problem if you don’t pay off the balance transfer card within the 0% interest period. If you don’t, you’ll start paying interest charges on the remaining balance on top of any interest on balances you’ve accumulated with the old cards.

Lindsey Salvestrin, president and CEO at Columbia Credit Union, also points out a potential problem if you charge new purchases on the balance transfer card. “Make sure you understand the rates that apply to new purchases, as they typically don’t qualify for the promotional 0% APR,” she says.

[Read: Best Credit Cards for Bad Credit.]

Fees May Counteract the Benefit of 0% Interest

Just because a card offers a 0% interest rate doesn’t mean it’s free. A balance transfer card may have an annual fee. It also may charge a fee every time you transfer a balance onto the card.

“A common drawback is forgetting there’s a cost to transfer a balance, usually between 3% and 5% of the amount being moved,” says Martin Lynch, president of the Financial Counseling Association of America. “That could eat into your savings a bit.”

So you have to make a comparison between how much interest you’ll save with the 0% card and how much you’ll pay in fees. In some situations, the fees might exceed the interest savings.

There May Be Risks to Your Credit Score

Any time you add a new credit account or apply for one, it could ding your credit score.

Another potential issue is what happens to your old credit cards after a balance transfer. As noted above, if you simply start building the balance on your old cards back up, you could negate the benefit of the balance transfer card. However, immediately canceling your old cards isn’t the right move either.

The age of your credit accounts is a factor in calculating your credit score. The older those accounts are, the better. So eliminating some of your older accounts may be bad for your credit.

Another factor in calculating credit scores is the percentage of your credit limits currently in use. In this case, the lower that percentage is, the better. So if you cancel your older credit cards, you’d reduce your total credit limit and your remaining balance would represent a higher percentage of that limit.

Using a balance transfer card means walking the line between retaining old credit card accounts and not giving in to the temptation to use the extra credit limit to overspend.

[Read: Best Secured Credit Cards.]

How to Do a Balance Transfer the Right Way

Given the pros and cons of a 0% balance transfer, how do you take advantage of the positives and minimize the negatives to use the card correctly?

Here are some tips:

— Use a balance transfer card as part of a broader debt reduction strategy. This means sticking to a strict budget so you don’t simply run your balances back up.

— Do a full cost comparison between a balance transfer card and your existing cards. Make sure this comparison considers not only interest charges, but also balance transfer fees and annual fees. As Carlson says, “Read the fine print. Make sure there isn’t a high one-time balance transfer fee that negates the 0%.”

— Sideline your old credit cards without canceling them. Don’t use those cards for any new charges that you can’t pay off within a month. But keep them up and running to avoid hurting your credit score.

— Make the card’s monthly payments on time to preserve the 0% interest rate. Otherwise, as Lynch points out, “If you miss or are late with a payment, you may wipe out the grace period and be required to begin paying at a higher rate immediately.”

— Have a plan for paying off the debt on your balance transfer card within the 0% interest period.

— Shop around before choosing a balance transfer card. Fees and the length of the 0% balance transfer period are key considerations. In particular, Salvestrin advises consumers to “find a card that doesn’t charge a balance transfer fee.”

A 0% balance transfer card is a financial tool, not a magic wand. Even so, when used wisely it can help make your debt disappear.

More from U.S. News

Balance Transfer or Personal Loan: Which Is Best?

Maxed-Out Credit Card? Next Steps to Take

Can I Declare Bankruptcy for Credit Card Debt?

The Pros and Cons of a 0% Balance Transfer originally appeared on usnews.com

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