3 Little-Known Risks of Using a Balance Transfer Credit Card

A balance transfer involves moving debt from one credit card or loan to another, usually to get a lower interest rate. A balance transfer credit card is a card designed to receive the balance transfer. Many of these credit cards come with a low or 0% introductory APR period, during which your interest payments could be greatly reduced. In theory, this can help you pay off credit card debt, as you can apply the money you save on interest toward your principal.

To be sure, balance transfer credit cards can play a vital role in paying off debt. But it's important to understand how they work, as they also come with risks that could work against your debt repayment strategy. If you're considering one of these cards for your personal finances, here are some common risks to watch for.

1. Balance transfer fees

Balance transfers aren't free. You'll pay a fee, usually equal to 3% to 5% of the amount you're transferring. For example, if you're transferring $6,000 of debt to a 0% intro APR card with a 5% balance transfer fee, you'd pay $300 in fees.

More often than not, the balance transfer fee will be significantly cheaper than what you'd owe on monthly interest. Say, for instance, that your original card has an APR of 21.47%, which is the average credit card interest rate according to the Federal Reserve. And let's also assume that you're going to put $500 toward your $6,000 credit card debt each month. Plugging some numbers into our credit card payoff calculator, we'll see that you would pay $814 in interest over 14 months. Transferring the same amount to a balance transfer card with a 5% transfer fee could mean saving over $500.

But it's important to do the math, because it doesn't always work out. For example, if you had $1,000 in credit card debt, you would pay $50 on a card with a 5% transfer fee. If you were paying $250 each month on the original card with a 21.47% APR, you'd pay $47 in interest by the time you paid off the balance. Run the figures for yourself, and don't assume the balance transfer will always be the savviest economic choice.

2. New purchases might not fall under the 0% APR promotion

The best 0% intro APR credit cards have promotional APR periods for both balance transfers and new purchases. This means you won't pay interest for purchases you make with the credit card during the promotional period. But it's important to clarify this before you apply, because not all balance transfer credit cards will defer interest for new purchases.

Even if your balance transfer card does offer a 0% APR period for new purchases, it might be shorter than the period offered for balance transfers. For example, a card may offer a long 0% APR period of 18 months for balance transfers, but for new purchases, the 0% APR period may be six months. Once this intro 0% APR period ends, the card's regular APR will kick in, after which you'll accrue for unpaid balances.

Of course, if you're only using the card for balance transfers, this shouldn't concern you. But if you're also planning to use the credit card for new purchases while paying off debt, keep this in mind.

3. Credit limits may not allow for a full transfer

Finally, be aware that you can only transfer up to the credit limits on your new balance transfer credit card, which might prevent you from transferring the full amount owed on your original card. So if your credit card company gives you $5,000 for a credit limit, you cannot transfer a balance above that amount.

What's more, your card issuer will also charge the balance transfer fee to your new card, which could reduce how much you can transfer. So if you owe $5,000 in credit card debt and you have a balance transfer card with a credit limit of $5,000 and a 5% transfer fee, you can't transfer the full $5,000. Instead, you could transfer about $4,761.90, which would result in a $238.10 balance transfer fee.

All told, balance transfer credit cards are a popular way to pay off credit card debt. As long as you heed these risks, they could stop debt from snowballing out of control, especially if you get a long 0% intro APR period. Take a look at our list of best balance transfer cards and see if one could help you pay off your credit card faster.