A Balance Transfer Could Backfire Big Time in This Situation

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  • Balance transfers allow you to reduce the interest rate on credit card debt.
  • You can transfer the balance of current cards to a new card with a 0% introductory rate.
  • This can save you money -- but only if you have your spending under control. 

Don't take a balance transfer if this could happen to you.

If you currently have credit card debt you're working on paying down, it may be worth thinking about doing a balance transfer. Suze Orman recommends this approach as a method of helping to pay debt back, as do many other financial experts.

Balance transfer offers come from credit card companies. Sometimes, you'll need to open a new card to take advantage of one, and in other circumstances a current card issuer will offer one. Generally, these offers allow you to transfer an existing credit card balance for a small fee of around 3%. Then, you're charged 0% interest on the transferred balance for a period of time, such as 12 months.

Since credit card interest rates tend to be very high, taking advantage of a balance transfer offer can make debt payoff much cheaper and easier. Since none of your payments will go toward interest while the 0% rate is in effect, you can pay down your principal more quickly as every dollar goes toward reducing your debt.

But while this can be a great way to make progress on becoming debt free, there is one situation where a balance transfer could backfire and leave you much worse off.

You should avoid a balance transfer in this situation

A balance transfer could end up being a big mistake for you if you transfer existing debt without taking control over your spending first.

See, when you open a new balance transfer card and you move your current card balance onto it, this has the effect of freeing up credit on your old credit cards. And if you do not have good control over your spending, it's very possible you could end up starting to use those cards again for purchases you cannot afford to pay back.

If this happens, you could end up with a large credit card balance on your existing credit cards before you know it -- and you'd have the balance transfer card to pay off as well. And you could find yourself much deeper in debt.

Say, for example, you had two credit cards and owed $2,000 on each one -- and you subsequently transferred both balances. You'd now owe $4,000 plus the balance transfer fee on the new card you opened. If you ended up charging another $2,000 on each of the cards that you previously carried balances on, you would find yourself more than $8,000 in debt across all three credit cards.  

How can you avoid making this balance transfer mistake?

In order to avoid finding yourself in a really bad situation after a balance transfer, you'll want to make sure you have a budget that allows you to live within your means and that you can reliably stick to it. You'll also want to make sure you can cover your costs without taking on more debt even once you begin making payments on your balance transfer.

If you're confident you won't charge up your old cards again and you have a plan for paying off your balance transfer card, then you can move forward with transferring a balance and hopefully improve your financial situation. But if that's not your situation yet, you'll likely want to get better control of your financial life before attempting this debt payoff approach. 

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