It is possible to transfer loan debt to a balance transfer credit card. But it’s best to only use a balance transfer card to lower your existing credit card debt burden. Here’s why.
Balance transfer credit cards are best known for allowing cardholders to move existing credit card debt onto a new card, usually with a 0% promotional rate that lasts anywhere from six to 20 months.
The obvious benefit is saving a lot of money on interest, since the average credit card APR is more than 16%. Consolidation is another pro; it’s easier to make one monthly payment than it is to make several different payments.
Some people are interested in extending these benefits to other loans. It is often possible to transfer other debts onto a balance transfer credit card (although policies differ from bank to bank). Potential examples include personal loans, car loans, student loans and home equity loans. However, it’s usually best to only use a balance transfer card to lower your existing credit card debt burden. Here’s why.
Your interest rate will be much higher after the 0% term expiresAt some point, the party is going to end. And once your 0% balance transfer offer expires, there’s a good chance your interest rate will skyrocket to something like 15%, 20% or even 25%.
That’s common for a credit card, but it’s probably much higher than you’re paying on a car, student or home equity loan. You typically have a lot more time to pay those debts, too. And those are more likely to offer other benefits (for example, student and home equity loans can be tax-deductible, and student loans are especially likely to offer possible forgiveness and forbearance options). Think about the entire picture, not just the 0% window.
Speaking of which, don’t view a balance transfer card as an excuse to overspend. I think the best way to use a balance transfer card is to avoid making any new purchases. Once you’ve completed your initial transfer(s), divide how much you owe by the number of months in your 0% promotion and stick to those monthly payment amounts. That ensures you’ll be debt-free by the time interest kicks in.
See related: How do balance transfers work?
Balance transfer fees are common
Almost all balance transfer cards charge an upfront transfer fee; it’s usually between 3% and 5% of the amount you’re transferring. This fee could be well worth it if it helps you avoid a 20% credit card APR for a year or more, but it’s a reason to think twice before moving a lower-rate debt to a balance transfer card.
Your credit limit will probably be relatively low
If you haven’t already been convinced not to use a balance transfer card for anything but credit card debt, consider this: Your balance transfer card will probably have a credit limit much lower than what you owe on your car, student or home equity loan. Equifax reported the average limit for a credit card opened in January 2021 was just $4,067.
See related: How to increase your credit limit
More fine print
Let’s say you have $3,000 of credit card debt with a certain bank. You can’t transfer that to a balance transfer card that you open with the same bank. Similarly, if you have an auto loan with Bank XYZ, you can’t move that auto loan debt to a balance transfer card that’s also issued by Bank XYZ.
Beyond that, your mileage will vary. Some banks are choosier than others regarding which external debts you can move onto a balance transfer card and whether they provide balance transfer checks for added flexibility. If you still want to pay off a loan with a balance transfer after reading this, I’d suggest calling customer service to make sure your individual circumstances are permitted before you apply.
Balance transfer credit cards are an excellent way to get out of credit card debt. Let’s say you owe $5,000 at 16%. If you only make minimum payments, you’ll be in debt for more than 15 years, and you’ll end up paying a grand total of about $10,400.
A much better option would be to transfer that balance to a card such as the U.S. Bank Visa Platinum Card, which has a 20-billing-cycle 0% balance transfer promotion (after that, the variable APR ranges from 14.49% to 24.49%). Including the 3% transfer fee, you would only have to pay about $258 per month to knock out the entire debt before the interest-free clock expires.
That’s an incredible deal – but the math usually doesn’t work out nearly as well if you’re considering using a balance transfer card to pay off your auto, student or home equity debt. It’s generally better to keep those separate.
Have a question about credit cards? E-mail me at email@example.com and I’d be happy to help.