The Balancing Act

I'm not sure if anyone else has heard about balance transfers, but lately I've been receiving several invitations from credit card companies to do a balance transfer. For those that don't know a balance transfer is where a bank will allow you transfer debt from another company to them. For example, if you have $2,000 worth of debt from various sources a bank may offer a balance transfer that will allow you to pay that debt all from the same bank within specific terms. That sounds good, but to me the negative always outweighs the positive. 

Pros:

  • You are able to consolidate debt
  • You can strengthen a relationship with the issuing bank
  • You may be able to get under a promotion with no APR

Cons:

  • There are fees:
    • APR (interest from the transfer)
    • Balance transfer fee, anywhere from 3% - 5% normally
  • You don't earn any rewards from the credit card
  • It is easy to budget incorrectly and go further into debt

I see why credit card issuers think it's a good idea for a balance transfer since they can profit from the fees but for most consumers it seems like a terrible idea. Suppose a bank were to offer you a balance transfer promotion and you decide to take the offer for $5,000. Once you initiate the process you could end up owing back the $5,000 plus the balance transfer APR (I've seen around 12% - 16%) plus the balance transfer fee of around 3%. Assuming you paid back the minimum balance (roughly 4% of the total balance, $5,175 ($5,000 plus the %3 balance transfer fee)) it would take 10 years and 5 months to pay off the debt. Even if you were able to join a promotion with no APR, it's normally over 6 months which is a very short period of time to pay a large debt. I'm personally not a fan of this since most people can find better interest rates to repay debts. While credit cards can be a great vehicle to build credit it would seem that using a balance transfer starts a slippery slope to go further into debt rather than climbing out of debt.