Is Dave Ramsey right that you should avoid this debt repayment approach?
- Credit card debt can be difficult to pay off due to high interest rates.
- Balance transfers are a common approach to paying off credit card debt.
- Financial expert Dave Ramsey thinks balance transfers can be problematic.
Credit card debt is one of the hardest types of debt to pay off. Interest rates on credit cards tend to be very high. This means that when you make payments, a large portion of the money you send goes to cover those interest charges. This happens instead of reducing your balance to progress on winnings.
To deal with this problem, many people with credit card debt use balance transfer credit cards. Although this approach is common, financial expert Dave Ramsey advises against it. In fact, in a recent blog post, Ramsey said, “This ‘solution’ to your credit card debt is like trading a bunch of problems for an even bigger problem.”
How Balance Transfers Work
To decide if Ramsey is right about balance transfers, it’s important to understand exactly what they are. As Ramsey explained on his blog, a balance transfer is “when you transfer all your credit card debt to a new credit card that has a low introductory interest rate.”
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Typically, you can get a 0% APR balance transfer card that lets you pay no interest on your transferred debt for 12-15 months. And while Ramsey warns that you will pay balance transfer fees, the reality is that you pay around 3% to 4% of the transferred amount. This equates to a very low APR compared to what you were probably paying on the credit cards you transferred the balance from.
Is balance transfer the right choice for you?
Balance transfer cards significantly reduce your interest rate and allow your entire payment to be used to pay off the principal (the amount you already owe, rather than just the interest). So it can be hard to understand why Ramsey thinks taking advantage of this option is problematic. But he has a simple explanation: “A huge spike in your interest rate will hit you like a ton of bricks if you only make one late payment or the introductory period expires.”
Ramsey is right about this. Unlike when you take out a personal loan to consolidate and refinance debt, you don’t have a fixed repayment schedule with a balance transfer. The minimum payments due on your transferred balance will likely be less than the amount it would take to pay off your transferred debt before your 0% APR period ends. So you could be stuck with sky-high credit card debt when your introductory rate expires, just as Ramsey warns.
Since minimum credit card payments are very low, it could take you decades to pay off the transferred balance if you only pay what is necessary, as it would be if you kept your credit card debt. initial credit. So you don’t solve the underlying problem of owing money on an expensive form of debt with a long repayment period simply by transferring a balance.
However, if you’re using a balance transfer as a tool to help you with a repayment plan, it might be a smart move. If you know you can pay significantly more than the minimum due and can pay off all of your balance (or most of it, if applicable) before the introductory rate ends, transferring a balance and lowering your rate could be a smart move. It all depends on your personal situation and your plans to make the balance transfer work for you.
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