Dave Ramsey Says This Common Debt Payoff Approach Is 'Like Trading a Bunch of Problems for One Even Bigger Problem'

Is Dave Ramsey right that you should avoid this debt payoff approach?

Credit card debt is one of the most challenging types of debt to pay off. The interest rates on credit cards tend to be very high. That means that when you make payments, a lot of the money you send in goes toward covering those interest costs. This happens instead of reducing your balance to make progress on payoff.

To deal with this problem, many people with credit card debt use balance transfer credit cards. Although this approach is common, finance expert Dave Ramsey advises against it. In fact, in a recent blog post, Ramsey said, "This 'solution' to your credit card debt is like trading a bunch of problems for one even bigger problem."

How balance transfers work

When deciding whether Ramsey is right about balance transfers, it's important to understand what exactly they are. As Ramsey explained on his blog, a balance transfer is "when you move all your credit card debt into one new credit card that has a low introductory interest rate."

Typically, you can get a 0% APR balance transfer card that allows you to pay no interest on your transferred debt for as long as 12 to 15 months. And while Ramsey warns you'll pay balance transfer fees, the reality is that you pay about 3% to 4% of the transferred amount. That equates to a very low APR compared to what you were likely paying on the credit cards you transferred the balance from.

Is a balance transfer the right choice for you?

Balance transfer cards dramatically reduce your interest rate and allow your entire payment to be used to pay down principal (the amount you owe already, rather than just interest). So it may be hard to understand why Ramsey thinks taking advantage of this option is problematic. But he has a simple explanation: "A huge spike in your interest rate will hit you like a ton of bricks if you make just one late payment or the introductory period expires."

Ramsey is right about this. Unlike when you take out a personal loan to consolidate and refinance debt, you don't have a fixed payoff schedule with a balance transfer. The minimum payments due on your transferred balance will likely be below the amount it would take to pay off your transferred debt before your 0% APR period ends. So you could be stuck with credit card debt at a very high rate when your intro rate expires, just as Ramsey warns.

Since credit card minimum payments are very low, it could take you decades to repay the transferred balance if you are only paying what is required -- just as it would if you kept your original credit card debt. So you aren't solving the underlying issue of owing money on an expensive form of debt with a long payoff period just by transferring a balance.

However, if you use a balance transfer as a tool to help you with a payoff plan, this may be a smart move. If you know you can pay substantially more than the minimum due and can repay your entire balance (or most if it) before the intro rate ends, then transferring a balance and dropping your rate could be a smart decision. It all depends on your personal situation and your plans for how to make a balance transfer work for you.