1 Time When Balance-Transfer Credit Cards Don't Make Sense

By Nathan Hamilton Markets Fool.com

The dangerous thing about using credit cards is that if you don't use them carefully, you can wind up neck-deep in debt -- and getting out of that debt will cost you dearly. If you're paying off a $10,000 balance over two years, and your APR is 18%, then youcan expect to pay about $2,000 in interest.

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However,a0% introductory APR balance-transfer credit card can grant you a reprieve from interest lasting anywhere from 12 to 21 months. During that period, all your payments will go straight to the principal amount owed, allowing you to pay off that debt a lot faster.

But there are instances when applying for a balance-transfer credit card might not make sense. In the following video segment, Motley Fool analysts Michael Douglass and Nathan Hamilton discuss when other debt-paying strategies may be better options.

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Michael Douglass: OK, so here at The Motley Fool, we're excited about debt reduction, and we believe very strongly in finding ways to cut down your debt, so you can use more money for investing, for vacations, for, well, whatever.

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Nathan Hamilton: Your financial independence.

Douglass: Absolutely. And because of that, we're big fans of balance transfer credit cards, because they enable you to basically take this balance that you're paying interest on, every month, and transfer it to something, to this new credit card where for a time period, whether it's 12 months, or 21 months, or some other number, you aren't, and you're able to really pay down that debt. However, there are some circumstances in which a balance-transfer credit card doesn't make the most sense. Let's talk about those.

Hamilton: Yeah, it primarily comes down to when you're applying for a sign-up bonus and you're also bad at budgeting. To put this in context, why those two combined are a recipe for not reaching your financial goals is, a balance transfer-credit card is really meant to more than dip your toes in, essentially, disrupt your finances and start paying off your debt faster. Spending money to earn a sign-up bonus to earn rewards, it flies in the face of paying down, of doing what you can to pay down your debt faster.

There are the potential risks of, "OK, I'm spending money on the credit card, but also paying it down faster. Maybe I'm not budgeting as well as I can." The overall net effect is you're still incurring or maintaining a balance. So, caveats to this. If you are good at budgeting and meeting your credit card goals, sure, signing up for a sign up bonus and taking that money and funneling it toward paying down debt and earning rewards to pay down debt faster. Yeah, it has that snowballing interest effect to it, so it does make sense in those scenarios, but if that doesn't sound like you, if you've had trouble with credit card debt before, if your budget isn't maintained as well as you'd like it, OK, maybe think twice about it.

Douglass: Sure, absolutely. And we've got a lot more information about balance-transfer cards, credit card bonuses, and actually, in fact, our picks for the best balance-transfer cards at fool.com/credit-cards. So check us out there, and we've got a lot more information to help you.

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