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If the balance on your credit card keeps going up, you’re not alone. Americans are charging more than ever, with the average household credit card debt just over $8,000.¹ While paying down balances can be overwhelming due to high interest rates, balance transfer credit cards can not only make the process faster, but it can save you a lot of money if done correctly.
How a balance transfer benefits your bottom line
A balance transfer allows you to move your outstanding balance from one credit card (or several credit cards) to another credit card account. Large balances with high interest rates are great candidates for balance transfers.
A balance transfer typically offers the following benefits:
- Lower interest rates: Introductory annual percentage rates (APR) between 0 percent and 5 percent can help you pay down your balance faster. Typically, introductory rates can last anywhere from 6 to 21 months.
- Lower total monthly minimum payment: The lower interest rate means that more of your money goes towards reducing your balance, and less towards interest.
- Simplified payments: If you have high interest debt on multiple cards, consolidating your debt into one monthly payment reduces the number of monthly bills.
“To make a balance transfer work in your favor, you need to look very closely at the terms and conditions of the offer to make sure you’re getting the most out of it,” says Bruce McClary, Vice President of Communications with The National Foundation for Credit Counseling (NFCC).
That means before you jump at a balance transfer offer, you need to make sure you follow some balance transfer golden rules.
Check your credit
Before you set out applying for a balance transfer, it’s vital you know your credit score. Your credit score is going to be what determines whether you get the best available rates and the most affordable terms or the highest available interest rates and the costliest terms.
Credit cards that offer the best balance transfer terms require good or excellent credit and it’s helpful to target your search to the cards you’re likely to qualify for. Learn where to obtain your credit score by visiting the Consumer Financial Protection Bureau (CFPB).
Most balance transfers come with a transfer fee, which can run between 3%-5% of the total amount transferred. Depending on the amount of your balance, you could pay a hefty fee upfront in an effort to reduce your debt.
For example, if you’re consolidating $10,000 on a 5 percent transfer fee, $500 will be assessed – making your total payoff balance $10,500.
A limited amount of credit cards offer a 0% transfer fee. The cards that do are only available to those with excellent credit. So, if you can’t avoid a transfer fee, you’ll need to confirm the lower interest rate savings are greater than the transfer fee.
A balance transfer calculator can help you figure out how much you can save.
“Transferring your balance has to save you money in the long term. If it doesn’t, you shouldn’t do it.” -Bruce McClary, VP of Communications, NFCC
Introductory Interest Rate
To avoid interest fees entirely, it’s vital to pay off the balance before the introductory period expires. As mentioned, most introductory periods can run from a minimum of 6 months to 21 months and after the period expires, the APR goes way up.
“An interest-free introductory rate is a great deal because it helps you accelerate the pay-off of the balance – if you manage it correctly. If you don’t manage it correctly and don’t pay-off your balance, then you’re going to end up paying whatever the regular interest rate is for that card,” says McClary.
If you don’t pay off your balance before the introductory period ends, it’s crucial you know your “go-to” rate – which is the interest rate you pay once the period ends.
Failing to make timely payments during the introductory period can really derail your plans to pay off the account quickly. If you miss a payment while you’re still under the terms and conditions of the introductory rate, it could cancel the remainder of the introductory period and send your interest rate up to the regular amount or even higher to a penalty interest rate.
Bottom line on balance transfers
Before you decide on transferring a balance to another card, McClary says it’s imperative that you shop around. “You may see a great offer on a balance transfer that you think is the bee’s knees, but you really are doing yourself a disservice if you don’t take a moment, step back, and use comparison tools to see if there may be a better offer that’s more competitive than the one that caught your attention.”
Also, resisting temptation to spend on both your old and new balance transfer credit cards will guarantee that you won’t get into the same debt pitfalls that caused you to transfer your balance in the first place. Discipline is key with balance transfers and provides the opportunity for you to get out of debt and use the savings to build a solid financial life.
McClary recommends developing a plan that will help you achieve success in paying down the debt you transferred, while balancing your budget so you can meet all your other financial obligations.
1. Average credit card debt – Wallet Hub 2017 Credit Card Debt Study: Trends & Insights – September 11, 2017