Whether intentional or not, using your credit card regularly can rack up debt in the blink of an eye. It’s easy to get in over your head with credit card bills and interest fees, but there are some options to help you pay down that debt quickly and avoid paying huge interest fees. One of these options is to use a balance transfer card.
What is a Balance Transfer Card?
Using a balance transfer card does NOT eliminate the debt. It is simply paying off an old credit card with a new credit card, but the new credit card offers you an interest-free period of time, usually 6-18 months, to save you money on interest payments. There is sometimes a balance transfer fee, usually around 3 percent of your balance, but you can often find special offers that have no balance transfers fees.
When shopping for a balance transfer card, try to find ones that offer no balance transfer fees and 0% APR for as much time as possible, preferable at least 18 months.
Keep in mind that a balance transfer card is another credit card, and opening a new account will result in a temporary ding on your credit. But if the new account has a higher limit than your current card, then your utilization ratio will improve. This actually improves your score and may make up for the small drop.
Consider your Current Credit Situation
Balance transfer cards are competitive, so make sure you’re in a good position to be approved before applying. You should have a decent credit score and no big red flags on your credit report that would dissuade the bank from approving your application.
You should also take into consideration any other high-interest debts you’re paying off, including car loans, furniture or appliance loans, or any other installment debt that may be eligible to be transferred to a balance transfer card. Consolidating can save you a lot of money if you can pay it all off during the interest-free period, and you’ll be less likely to miss a payment when you have fewer accounts of which to keep track.
Have a payoff plan
Make a plan to payoff your balance during the 0% interest period. Missing even a single payment may result in the offer being rescinded, so it’s important that you know what your income will be during that time and how much you will undoubtedly be able to allot to these payments.
Be realistic about your repayment ability, especially in terms of the balance card offer time-frame. If you have a significant balance, you may not be able to pay it off in the 6-18 month introductory period of the new card, and will probably be faced with higher interest charges than your old cards. If this is the case, it may be wiser to find a different card with a lower consistent APR.
Follow through with old accounts
Just because you pay off an account doesn’t mean you should close it. This could actually hurt your credit by lowering your credit utilization ratio. Keep it open so that your credit report shows that the credit is available, but don’t use it. Also keep in mind that it takes a while for the balance to transfer, and during that time you’ll still need to make any payments that are due on your old card and accounts.
Avoid new purchases
New purchases are often subject to higher interest rates, and not included in the low-interest offer. But any payment you make over the minimum required is applied to the account with the highest interest, so this may drag out your repayment and subject you to more interest payments long-term. If possible, avoid making new purchases on your balance transfer card so you can focus on paying off the existing balance.
Evaluate your Spending Habits
Transferring balances should not be a regular practice. Having new accounts pop up frequently on your credit history reflects poorly on your spending habits, and shows an inability to manage your debt. Not to mention each card likely comes with transfer fees that can add up to several hundred or even thousands of dollars if you transfer balances regularly.