Transferring a loan balance to a credit card may seem like a viable option to reduce interest payments, but it’s important to carefully consider the implications before making such a decision.
Balance transfer credit cards provide the opportunity to move existing credit card debt to a new card with a promotional 0 percent interest rate, typically lasting from six to 21 months. The main advantage is the potential for significant interest savings, given that the average APR for credit cards is currently over 19 percent. Consolidation is another benefit, as it simplifies monthly payments by consolidating multiple debts into one.
It may be tempting to extend these benefits to other loans like personal, car, student, or home equity loans by transferring them to a balance transfer credit card, although policies may vary across banks. However, it is generally advisable to use a balance transfer card solely for reducing existing credit card debt.
Before proceeding with a loan transfer to a credit card, several important factors should be considered:
- Higher interest rates after the promotional period: The 0 percent offer will eventually expire, and the subsequent interest rate could rise significantly, potentially reaching 20 percent or even 25 percent. Such rates are common for credit cards but are typically much higher than those for car, student, or home equity loans. It’s crucial to evaluate the overall picture, taking into account factors like loan repayment periods and any additional benefits associated with non-credit card loans.
- Balance transfer fees: Most balance transfer cards impose upfront transfer fees, usually ranging from 3 percent to 5 percent of the transferred amount. While this fee might be justifiable in avoiding a 20 percent credit card APR for a year or more, it’s important to think twice before transferring a lower-rate debt to a balance transfer card.
- Potential credit limit constraints: It’s worth noting that the credit limit on a balance transfer card is likely to be lower than the outstanding balance on car, student, or home equity loans. According to Equifax, the average credit card limit for cards opened in July 2022 was just $5,115.
- Limitations on transfers: Balance transfer options are subject to limitations. For example, you cannot transfer credit card debt from a certain bank to a balance transfer card issued by the same bank. Similarly, transferring auto loans from Bank XYZ to a balance transfer card issued by Bank XYZ is typically not possible. Moreover, different banks may have varying criteria for external debt transfers and may offer balance transfer checks for added flexibility. It is advisable to contact your card issuer’s customer service department before applying to ensure that your desired loan transfer is feasible.
Benefits and drawbacks of loan transfers to credit cards:
Benefits:
- Temporary avoidance of interest payments, resulting in potential cost savings.
- Facilitation of faster debt repayment.
- Streamlining of debt management.
Drawbacks:
- Incurrence of balance transfer fees.
- Likelihood of higher interest rates once the 0 percent promotional period expires.
- Difficulty in paying off debt if not cleared before the end of the interest-free period.
Determining the worth of transferring a loan to a credit card:
Balance transfer credit cards can be an excellent tool for tackling credit card debt. For instance, consider a scenario where you owe $5,000 at a 16 percent interest rate. If you only make minimum payments, you would remain in debt for over 15 years, with a total repayment amounting to approximately $10,400.
In contrast, transferring this balance to a card like the U.S. Bank Visa® Platinum Card, which offers an 18-billing-cycle 0 percent introductory balance transfer promotion (followed by a variable APR ranging from 19.49 percent to 29.49 percent), can provide significant benefits. With a 3 percent or $5 (whichever is higher) transfer fee, you would only need to pay around $286 per month to eliminate the entire debt before the interest-free period ends. This represents a remarkable opportunity.
However, the calculations and benefits may not be as favorable when considering transferring other types of loans such as auto, student, or home equity loans to a balance transfer card. In general, it is advisable to keep these loans separate.
To make an informed decision about transferring a loan to a credit card, it is crucial to have a well-thought-out plan to aggressively pay down the debt during the introductory 0 percent period, which can extend up to 21 months. By doing so, you can avoid costly interest charges and expedite your debt repayment.
Nevertheless, if you fail to pay off your debt before the promotional period ends, you will likely face a higher interest rate compared to your previous loan, making it more challenging to eliminate the debt. Therefore, it is essential to carefully calculate and plan your strategy before committing to the loan transfer.
Please note that the editorial content provided in this response is based solely on the objective assessment of our writers and is not influenced by advertising considerations. While we strive to provide accurate and up-to-date information, we recommend consulting with financial professionals or relevant institutions for specific advice and guidance.
