Pay off a loan with a balance transfer card?

You have the option of transferring another type of loan balance to a credit card, but you may not want to do so in the long run.

Balance transfer credit cards allow cardholders to transfer existing credit card debt to a new card, usually at a zero interest rate, that lasts between six and 20 months. The obvious benefit is saving a lot of money on interest since the average annual interest rate on a credit card is currently over 16 percent. Consolidation is another benefit of balance transfer – it’s easier to make one monthly payment than several different ones.

You may be interested in extending these benefits to other loans—personal, car, student, or housing—and you can often transfer these types of debt to a credit card with a balance transfer (although the policy differs from bank to bank). However, it is usually best to use only the balance transfer card to reduce existing credit card debt. That’s why:

What to look for before transferring a loan to a credit card

Before taking this step, there are a few important things to consider:

Your interest rate will be much higher after 0 percent expires

Someday the party will end. And once your 0% balance transfer offer expires, there’s a good chance your interest rate will skyrocket to 20 or even 25 percent.

This interest rate is common on a credit card, but it is likely to be much higher than what you pay for a car, student, or home loan. You usually have much more time to pay off these debts. And those debts are more likely to come with other benefits (for example, student loans and home equity loans can be tax-exempt, and student loans can offer forgiveness and forbearance options). So, it’s important to think about the whole picture, not just the 0 percent window.

Never consider a balance transfer card as an excuse to overspend – the best way to use this type of card is to avoid making new purchases after you make the transfer(s). Once you have completed your initial transfer(s), divide the amount you owe by the number of months in your 0% promotion and pay that amount (or more) each month to ensure you are debt-free at an interest rate. blows in.

Balance Transfer Fee Common

Almost all balance transfer cards charge an upfront transfer fee, typically 3 to 5 percent of the amount you transfer. This fee may be well worth it if it helps you avoid a 20 percent annual interest rate on a credit card for a year or more, but it’s a reason to think twice before moving lower-interest-rate debt to a balance transfer card.

Your credit limit is likely to be relatively low

If you’re not yet sure you shouldn’t be using a balance transfer card for anything other than credit card debt, consider this: your balance transfer card will likely have a credit limit that’s much lower than what you owe on a car loan, student loan or home loan. . In fact, Equifax reported that the average limit on a credit card opened in January 2021 was only $4,067.

You have to deal with restrictions

Balance transfers are limited. Let’s say you have $3,000 in credit card debt at a certain bank. You cannot transfer this to a balance transfer card from the same bank. Similarly, if you have an auto loan with XYZ Bank, you cannot move that auto loan debt to a balance transfer card that is also issued by XYZ Bank.

In addition, some banks are stricter than others about what external debts you can transfer to a balance transfer card and whether they provide balance transfer checks for added flexibility. If, after reading this, you still want to pay off your loan by transferring the balance, call your issuer’s customer service department before you apply to make sure you can actually do what you want.

Advantages and disadvantages of transferring credit to a credit card

There are both advantages and disadvantages to consider before transferring your personal loan balance to a credit card:

Advantages

• Can save money by temporarily avoiding interest payments
• Can help pay off debt faster
• Can make debt repayment easier

Flaws

• Balance Transfer Fee
• Interest rate likely higher after 0 percent expiration
• It’s harder to pay off your debt if you don’t pay off the card before the end of the 0 percent period

Is it worth transferring credit to a credit card?

Balance transfer credit cards offer a great way to get rid of credit card debt. For example, let’s say you owe $5,000 at 16 percent interest. If you only make the minimum payments, you will be in debt for over 15 years and end up paying around $10,400 in total.

A much better option would be to transfer that balance to a card such as the US Bank Visa® Platinum Card, which has a 20-period billing cycle and a 0 percent balance transfer promotion (after that, the variable annual rate ranges from 15, 24 percent to 25.24). percent). Including a transfer fee of 3% or $5 (whichever is higher), you will only need to pay about $258 per month to pay off all debt before the interest-free period expires.

It’s an incredible deal, but the math usually doesn’t work out so well if you’re considering using a balance transfer card to pay off a car, student, or home loan. It’s usually best to keep them separate.

bottom line

If you have a plan to aggressively pay off your debt during the initial zero period (which can be up to 20 months), transferring credit to a balance transfer card can help you avoid high interest charges and pay off your debt faster.

However, if you fail to pay off your debt before the end of this period, you will likely receive a higher interest rate than before, making it harder to pay off your debt. The key to transferring another type of loan to a balance transfer card is to do the math and plan accordingly before signing the dotted line.

Ted Rossman is a senior industry analyst at CreditCards.com. He has spent the last decade in the personal finance industry, conducting consumer and industry research and providing commentary for the media and consumers. Its main focuses include credit cards, debt management and credit ratings. Ted regularly shares his advice through major media such as Good Morning America, Wall Street Journal, CNBC and Fox Business. He also writes a weekly “Wealth and Desires” column for CreditCards.com, which is mostly about cashback credit cards.

Jacqueline DeMarco Jacqueline writes personal finance articles for CreditCards.com and has worked with over a dozen financial brands including LendingTree, Credit Karma, Fundera, Chime, MagnifyMoney, Student Loan Hero, ValuePenguin, SoFi and Northwestern Mutual, providing thoughtful content to give readers insight into complex topics they probably didn’t learn in school. You can learn more about her work and connect with her on LinkedIn or JacquelineDeMarco.com. She is sometimes even interviewed about her career and running a freelance writing business.