Is It a Good Idea to Transfer Credit Card Debt?

Often, it is -- though there are some big caveats.

Often, it is -- though there are some big caveats.

Dealing with high-interest credit card debt can be extremely stressful. In fact, The Ascent recently found that 97% of Americans living with debt believed they would be happier overall if able to create a debt-free life.

No matter how large your debt grows, it's important to maintain a level head when making financial decisions. Acting out of fear or desperation can make matters worse and can even lead to bigger financial obligations like payday loans.

One common debt management tactic is transferring the balance from one or more credit cards onto one new card. But are you just trading one bad situation for another? Let's take a look.

What's a balance transfer?

A balance transfer is the act of paying off the balance of one credit card by transferring your debt to another credit card. The second credit card should have a lower interest rate, meaning you'll pay less interest every month and be able to pay off your debt more quickly. 

A good time to take advantage of a balance transfer is when your interest payments have become unmanageable. If you're paying more in interest than you are in actual debt, you're not making much of a dent in your balance.

Balance transfer credit card perks to look for

You don't want to transfer your credit card balance to just any card. Almost any credit card will let you transfer existing balances, but that's because the issuer makes money in fees and interest in the process. Instead, look for balance transfer credit cards with the perks below.

0% intro APR

The credit cards that are specifically designed with balance transfers in mind will often offer a 0% introductory APR period. APR stands for annual percentage rate and is an indicator of how much you'll pay in interest for purchases.

When transferring credit card debt, the 0% introductory APR allows you to avoid monthly interest payments for an amount of time specified by the credit card company. Card issuers often offer 0% intro APR anywhere from 12 to 24 months.

You can use that time to significantly reduce your credit card debt. Even if you can only make the same payments you were making on your previous card, the lack of interest charges will help you reduce your balance much faster.

Balance transfer fees

When you transfer a balance, the issuer of the new card will generally charge you a fee. For credit cards that aren't specifically designated as balance transfer cards, that fee can range from 2% to 5%. Depending on the amount of your existing debt, that can be a big chunk of change.

Seek out credit card offers that waive balance transfer fees. You'll need to look for offers outside your current credit card company. Simply switching to another card with the same company won’t provide the necessary perks to make a debt transfer actually worth it. That's because the company doesn't stand to gain anything from allowing you to transfer your debt -- besides the fees it would charge for the transfer.

Instead of letting your anxiety steer your efforts to get out of credit card debt, make sure you’re in control and transfer your debt to a card with terms that work for you.

Balance transfers and your credit score

After you successfully transfer your credit card balance, you might notice that your credit score takes a short-term dip. While you may think the dip is related to the balance transfer itself, it has much more to do with credit report inquiries made on your behalf and the average account age of your debts.

Credit inquiries

Your eligibility for balance transfer offers is determined by your credit history. That means credit card companies will pull your credit report to determine whether you're worth the risk. That inquiry will have a temporarily negative effect on your credit score. Because the balance transfer will help you pay down your debt, thus raising your score over time, the inquiries made by credit card companies will be worth it in the end.

Debt on file

When you're approved for a new card and transfer your balance, you also change your debt history on file with credit reporting agencies. The length of your credit history accounts for a large portion of your credit score, and the older your accounts, the better. Therefore closing an existing account will have a negative effect. You can even avoid this problem almost entirely by keeping your old card open and paying off any new balance every month.

Future mistakes to avoid

To avoid getting yourself in another tough situation, commit to making regular monthly payments on your new credit card. You should always refrain from spending more than what you can pay off in a given month. 

While emergencies do happen, it's important to set rules and limits for yourself so you can avoid past mistakes. In other words, don't sign up for a balance transfer card without a detailed plan to pay down your debt and maintain your financial health.