Credit card companies always seem to have new ways to motivate people to take on more debt. Sign-up bonuses for new cardholders is a common marketing tactic that can get people to open a credit card and start borrowing money with it.
Allowing for 0% interest or at least lower interest rates on balance transfers is a common sign-up bonus. If you currently carry a high balance on a credit card with a double-digit interest rate, having 12 or 18 months to pay off that card without more interest accruing can seem like the exact solution you need. However, balance transfers are often deceptive and they actually put you in a more vulnerable position once you complete the transfer.
A balance transfer means you have more credit to spend
Once you move that $8,000 balance from an existing credit card to a new card, you will have the entire amount of available credit ready for you to spend on the card that previously had a high balance.
It is all too easy for individuals to start charging substantial amounts to the same card that they just transferred a balance from. Within a few weeks or a few months, you could have not only the debt from the transfer to pay off but a new balance on the previous card to worry about.
Balance transfers usually aren’t free
While some credit cards will allow you to transfer a balance for a low introductory interest rate with no costs, most credit cards are going to assess a fee for a balance transfer. Usually, that fee is a percentage of the balance.
While you avoid paying more in interest, that fee increases the amount you have to pay. It’s also worth noting that you could wind up on the hook for interest accrued during the introductory period if you do not pay off the balance before that reduced interest rate expires.
Borrowing just to pay back borrowed funds doesn’t solve the problem
When you transfer a balance from one credit card to another, you don’t reduce how much you owe. In some cases, you may increase the amount you have to repay because of fees. Moving from one lender to another is an early warning sign that you are not in full control of your finances.
For those who feel like balance transfers are the only way for them to get their payments or ever-increasing balance under control, bankruptcy may be a better solution. Consumer bankruptcy allows for the discharge of unsecured debts, which will include those unsustainable credit card balances.