3 Ways a Balance Transfer Could Backfire

Balance transfer credit cards can be a really great financial tool. If you get a credit card offering a 0% APR on a transferred balance, you can move some of your debt over from cards that charge a much higher interest rate.

With the average credit card interest rate coming in at 20.09% as of February 2023, reducing your rate down to 0% could make a huge impact (even if you usually do get hit with around a 3% to 4% balance transfer fee when you move the money).

Unfortunately, balance transfers can sometimes backfire and end up making your financial life harder instead of helping you to succeed in becoming debt free. Here's how that could happen.

1. You could end up charging up your other cards again

The single biggest risk of a balance transfer is that you free up credit on the cards you're transferring the balance from. For example, say you have two cards with $2,500 balances. If you move the two $2,500 balances over to a new card, you now have a $5,000 balance on that new balance transfer card -- and $5,000 in available credit on the two existing ones.

If you don't have your spending under control, you could find yourself charging up the other cards again. If you ran up a $2,500 balance on both of those, you'd owe $10,000 instead of the original $5,000. That would leave you in a far worse position.

The key to avoiding this would be to make absolutely certain you trust yourself not to get deeper into credit card debt after your balance transfer is complete. If you are living on a budget, can keep your spending under control, and can swear off running up a new card balance, this won't be an issue for you.

2. You may feel you're making progress when you aren't

There's another pitfall to balance transfer cards. They can give you a false sense of accomplishment. Once you've paid off multiple cards with a balance transfer card and have just one debt -- and one monthly payment -- left, you may feel more free. But the reality is, you still owe the same amount you did before and haven't made any real progress on paying off your debt.

There's a risk of falling into the trap of just continuing to move debt around without ever actually becoming debt free. To make sure you don't fall victim to this, you'd want a solid plan to pay off the transferred balance.

3. You could get hit with a higher rate when the 0% promotion expires

Finally, the last big concern is that you could find yourself paying a high rate when the 0% promotion ends.

If you pay only the minimum due on the card with a transferred balance, you would not make much progress and could find yourself owing a ton of money at the end of the 0% promotional period. The card will likely jump back up to somewhere around the typical interest rate for credit cards, so you'd be back to paying a lot of interest again.

To avoid this, figure out how much you must pay each month to pay off the card's balance before the 0% period ends and try to pay at least that much every month.

The good news is, while there are ways a balance transfer can backfire, you can make sure that doesn't happen by following these tips. If you're confident you can do that, a balance transfer may just be a great debt payoff tool.