Michelle Singletary: Four reasons a credit-card balance transfer may be a bad idea

Some credit card users suffer from what I call “serial get-out-of-debt disorder.”

This means you, if you follow this pattern: You have the ability to aggressively cut expenses and/or are in a position to earn more to get out of debt. You pay it off, but credit cards with no balance somehow become an irresistible invitation to spend. The purchases start off slowly. You got this. You can pay off the balance by the due date. Then the debt starts to increase. Before long, it spirals up, and you can’t pay it off every month.

The promise you made to yourself that it wouldn’t happen again is broken.

Credit card balances spiked by $61 billion, to $986 billion, in the final quarter of 2022, according to data on household debt from the Federal Reserve Bank of New York. That surpassed the pre-pandemic high of $927 billion.

To deal with their disorder, serial debtors often turn to a common cure – a credit-card balance transfer.

To lure customers away from other companies, lenders entice folks with 0% balance-transfer promotions. Many offers right now range from 15 to 21 months.

If everything goes as planned, a 0% promotion can help you dig out of debt. But this strategy isn’t good for everyone. Here are four reasons a credit-card balance transfer is a bad idea.

You’re addicted to debt

You know who you are. You are good at erasing your credit card debt. But the euphoria you experience from getting out of debt doesn’t last long.

Without a balance on your credit cards, you begin spending again. The temptation to use other people’s money to get the things you want – vacation, new couch, spring wardrobe – is too great.

You aren’t disciplined

Someone gets a 0% balance offer and transfers debt from an old card. They figure out how much they have to pay every month to pay it off before the offer expires. Things go well, at least for a few months.

Then life gets in the way. There’s a car repair, or friends talk up a spring break trip or a summer cruise.

The 18-month, 0% offer seemed like it was enough time. Except time ran out. The rollover debt is now on a new card with a higher interest rate.

Ted Rossman, a senior industry analyst for Bankrate.com, was listening in on a earnings call when a lender said roughly half of 0% balance transfers are not paid in full by the time the promotion ends.

“A big part of the economics is, frankly, that they’re banking on a lot of people not paying by the time the clock runs out,” Rossman said.

Here’s another temptation for the undisciplined. Balance-transfer offers often come with a sweetener – 0% interest for a limited time on new purchases. If you’re trying to get out of debt, you have to stop spending. Yes, charges for new stuff are at 0%, but that adds to the money you owe.

You’re in the market for another loan

If you’re in the market for a mortgage or car loan, you need to be careful about applying for a credit card.

Let’s say a lender uses the FICO scoring model, in which credit scores range from a low of 300 to a high of 850. You have a credit score of 700, but when you apply for a balance transfer card, your score drops by 10 points. If a lender offers its best rates to consumers with a score of 700 or more, that decrease could land you in a lower pricing tier, ultimately resulting in a higher interest rate for a mortgage or car loan.

Also, the balance transfer could alter your credit utilization ratio, which can negatively affect your credit score.

Let’s say you have $4,000 in credit card debt and transfer that balance to a new card with a credit limit of $5,000. You are utilizing 80% of the available balance on the card.

The credit-scoring algorithm looks at the credit utilization ratio for each active account and, separately, a person’s credit usage for several accounts together. Basically, the ratio is determined by how much of your available credit you are using in relation to your total available credit. The more of your credit line you are using, the more it can negatively impact your credit score.

Instead of using more debt to pay off debt, you may be better off seeking help from a nonprofit credit counseling agency.

You’re an unrepentant spendthrift

Balance transfers often don’t work if you’re still spending recklessly.

Here’s what typically happens to spendthrifts who clear their debt. They move the balance to the card offering 0%. They don’t change their spending habits.

They clear the debt off their credit card only to run the balance back up.

You can play the balance-transfer shuffle game, but if you haven’t addressed the reasons behind your overspending, you’ll only temporarily find relief from debt overload.