A balance transfer can help consumers get out of credit card debt more quickly than some other methods of reducing a balance, but also can be tricky for some, according to a report from Birmingham, Alabama television station WBRC.
Consumers may be able to use a balance transfer to save money on interest fees, because many lenders will offer a low or even zero-percent introductory rate, the report said. Because of this, consumers would add little or no debt to their existing balance for up to a year in most cases. In addition, not adding debt for a period of time will help consumers pay down the existing balance on a card more quickly, particularly if they increase the amount they pay to the lender every month while reducing credit card spending.
In some cases, credit card debt may be transferred to a card that not only carries a great introductory rate, but the account might also allow them to earn rewards. However, the report warned that because this requires them to take on additional debt, it may not be the best idea if a person is trying to cut their balance.
But not every balance transfer is beneficial, the report said. Often, a lender will charge a fee to complete such a transaction. As a result, the size of the fee, typically a small percentage of the account's total credit card debt, can be larger than what the consumer would have paid to their old lender in standard interest rates.
In addition, a transferring credit card debt from one lender to another may lower a consumer's credit score if the new account carries a lower credit limit, the report said. This is because a large percentage of a credit rating is comprised of a person's credit utilization ratio, meaning that the more debt they carry versus what they're allowed to borrow will be viewed negatively.
Before making any major financial decision such as a balance transfer, consumers should carefully consider the pros and cons of such a transaction.