5 Disadvantages to Using A Balance Transfer Card

A balance transfer card can be a great financial tool for some people. However, for others it will do more harm than good. Let’s take a look at five cons to using a balance transfer card. 

How Do They Work?

Balance transfer cards are credit cards that allow you to move an outstanding balance to another credit card with a significantly lower promotional interest rate. Consumers do this in order to take advantage of new card benefits like rewards programs or cash back points.

Other ways in which credit card companies entice consumers to try a balance transfer card is by offering to waive the balance transfer fee. These fees are typically around 3-5% of the amount being moved over. There is also sometimes a period of about 6-18 months where they’ll offer no interest on the transferred sum. It can be a great option for some people, but not everyone.

Ongoing APR

One of the major cons of balance transfer cards involves the annual percentage rate (APR). An article written by Sebastian Orbando for forbes.com explains, “Before making a balance transfer, be sure to look at the regular ongoing APR of the new card once the promotional APR period expires. If the transferred debt is not paid in full before the 0% introductory APR expires, the remaining debt will be subject to the card’s regular APR. For many cards, this APR will vary depending on the applicant’s creditworthiness and could be even higher than the card you’re transferring from.

If you don’t think you’ll be able to pay off your debt within the promotional APR time period, compare the new APR with the APR on the card you’re considering transferring your debt from. If the new rate is higher, including factoring in the additional cost of a balance transfer fee, it could cancel out any progress you have made on reducing your debt and it may not be worth it to do a transfer.

In a case such as this, you can consider transferring only the amount of debt you expect to be able to pay off during the promotional period and leaving the rest on the original card with the lower APR.”

Balance Transfer Fees

As previously mentioned, some cards will waive the balance transfer fees when you move a sum of money onto their card. However, this is not always the case. If you have to pay a fee, it’s typically within 3-5% of the amount being moved over. Depending on how much credit card debt you have, this can really add up.

Credit Limits

You might have accrued quite a bit of debt that you’d like to transfer. The problem is, most balance transfer cards won’t let you move a lot of money over. You may only be able to transfer a portion of your debt over. There’s also the option of applying for a multiple balance transfer cards. But that can harm your credit. Also, the amount of credit you can get is based on a few different factors and varies from lender to lender.

Credit Inquiries

Balance transfer cards have the potential to be beneficial but only if you go about obtaining one in the right way. To further clarify, the above mentioned article states, “Although a balance transfer card can potentially improve your credit score in the long term, it can hurt it in the short term. That’s because credit scoring formulas consider recent applications for new credit. While a single new credit card application likely won’t lower a score significantly, applying for multiple new credit lines can. More importantly, if you will be shopping for a new loan like a mortgage in the near future, even a drop of a few points can result in a higher rate.”

Easier to Accumulate More Debt

Those with a spending problem should be very wary of opening a balance transfer card. Once you move your money over to a new card, you suddenly have all this credit available again. It can be really tempting to keep spending. If you struggle with impulse shopping, this is an extremely quick way to add to your debt burden.

Balance transfer cards can be beneficial when used correctly. Be cognizant of the downsides though. If you plan to transfer your debt to a different card, do it in a way that doesn’t ruin your financial reputation.