Are you struggling to pay your credit card debt? Perhaps you’re considering a balance transfer credit card to help you pay off your debt faster?
If so, you’re not alone. In fact, the average American household owes $6,194 in credit card debt and many are seeking strategies to reduce that number.
It may be tempting to transfer the balance on your credit cards to a no-interest balance transfer credit card. But should you?
Before you sign up for a new credit card, make sure you understand the ins-and-outs of these balance transfer cards so you can make an informed decision.
What Is a Balance Transfer Credit Card?
A balance transfer credit card allows you to consolidate all of your credit debt, from credit cards and loans to one low-interest card. Some balance transfer cards even have zero percent interest introductory offers for up to 24 months.
Transferring the balances to a low-interest card can be a good way to get control of credit card debt and tackle the principal debt since less money is going towards the interest.
Who Should Apply for a Balance Transfer Credit Card?
People with good to excellent credit
Getting a credit card with a 0% interest introductory period and no transfer fee generally requires a credit score of 740 or above. You can still get a balance transfer card with a lower score of 670-739 but the terms are not as attractive.
People who are struggling to pay off the principal
Are high-interest rates making it difficult to pay off your credit card debt? You may be able to get a balance transfer credit card and consolidate all your high-interest payments into one low-interest payment.
People who are aggressive about eliminating their debt
Transferring your balances to one low interest or zero interest card may reduce your monthly payments significantly. You could then direct the savings towards your debt principal.
Who Should Not Get a Balance Transfer Credit Card?
Anyone with a credit score below 670
The interest rate you receive will likely too high to be worthwhile. Instead, consider getting a personal loan with a low-interest rate. Depending on the terms, it may be worth it to consolidate your credit cards into one personal loan with a set term, typically one to three years.
Anyone unable to pay down the principal during the introductory period
If you are unable to make a dent in the principal balance, then you’ll be on the hook for higher interest rates once the introductory period expires. You may be better served with a low-interest personal loan with a fixed rate. We recommend Lending Tree to find the best rates, and they do a soft credit pull so your credit score won’t get dinged.
Anyone who struggles to stick to a budget
Balance transfer cards are a good idea if you can pay off most or all of your debt during the introductory period. Those who have success typically adhere to a budget to achieve their goals. If you find budgets too restricting, you might want to think twice before getting a balance transfer credit card.
5 Smart Steps to Transfer Your Credit Card Balance
Follow the following steps to transfer your debt responsibly:
1. Read the Fine Print
Before you accept an offer, read the fine print and determine how much this card will cost you in the long run. The key figures you need to consider are the:
Introductory interest rate
Preferably it’s 0%. If you don’t qualify for 0%, it should at least be significantly less than your current interest rate. Federal law requires all teaser rates to last for at least six months. You should have no problem finding introductory rates for 12 months to 18 months or more. Can you pay off your debt before the introductory period is over?
Annual percentage rate (APR)
What is the APR after the introductory period? Is it higher than your current rate? If so, will it put you right back at square one, struggling to make your monthly payment?
Balance transfer fee
Transfer fees are typically 0%-3% of the balance. If you don’t pay off your debt during the introductory period, does the bank calculate your transfer fee based on the amount of the original debt transfer? That’s something you’ll need to know as you figure out the total cost of the balance transfer card.
Minimum monthly payment
You need to find out exactly what the minimum payment will be so you can determine how much you are saving each month and how much you can direct towards the principal.
Check the fine print for a cap on the balance transfer amount. The last thing you want is to open a new account and discover the new credit card won’t be able to transfer all of your debt. Then you’ll be stuck with two credit cards to pay off.
It’s important to understand the terms before you sign. Make sure you are familiar with common balance transfer credit card myths so you know the truth. Once you know all the pros and cons of a balance transfer, you can make an educated decision.
2. Run the Numbers
Use a credit card balance transfer calculator to determine if you can pay off the balance in full during the introductory period. Ideally, you do not want to pay the higher interest rate on your credit balance after the promotional period expires.
Create a monthly budget and make sure you’ll have enough each month to pay the payment plus extra towards the principal.
Your budget doesn’t have to be anything fancy. Just get started. Write down all your income in one category, and all your expenses in the other. In your expenses category, write down all your debts but also make note of every purchase you’ve made in the past month.
Then look for opportunities for improvement. For example, if you see 20 trips to Starbucks in the last month, maybe you can make your coffee at home and save money.
Set up your account to automatically set aside all the money you need to pay your bills plus extra towards the principal. You’ll learn to adjust your lifestyle to live with the money that is leftover.
3. Make Sure You Qualify Before You Apply for a Balance Transfer Credit Card.
Once you’re sure the numbers make sense for you to get a balance transfer card, check your FICO credit score to make sure you qualify.
You can get a free Experian FICO 8 score at FreeCreditScore.com. Although this is for Experian only and not TransUnion or Equifax, it should give you a good idea of where you stand. Refer to this article if you want to see your FICO score and Vantage score for free.
If you have outstanding credit (740 or above) you will most likely qualify for the best introductory interest rates. If your credit isn’t quite that high, your teaser rate may be higher, but still lower than your current credit cards.
Obviously, the key is to make sure the new interest rate, plus the balance transfer fee, makes it worthwhile to transfer your credit cards and pay down your debt.
4. Consider Your Options
We’re partial to zero interest credit cards, but depending on your situation, you may want to consider other options, such as:
Debt consolidation loan
This is a personal loan to pay off your high-interest credit cards. You likely won’t find any 0% interest loans, but they typically come with a lower interest rate — useful for paying off your high-interest cards. You make regular payments to your lender for a period of time, usually 3-5 years until your debt is paid. If you make your payments on time, it’s a good way to improve your credit and pay off your debt.
Balance transfer credit cards
As we’ve been discussing, these zero or low-interest cards are a great place to transfer your high-interest credit card debt and pay it down aggressively.
Depending on the amount of your loan, you can take out a personal loan and pay off the debts yourself. You just have to be sure to use the money for what it’s intended for – paying off your debt.
You can find your best options for free at Even Financial and apply to borrow up to $100,000. Just type in your information, and their tool will compare interest rates from several lenders and let you know which option is the best for you. Rates start at 3.83% with repayment terms from 24-84 months.
5. Living With Your Debt Consolidation
Once you have a balance transfer credit card or debt consolidation loan, take advantage of the opportunity to pay down your debt.
Stop using the card for any purchases while you are paying off the balance. Pay as much as you can towards the principal and watch your credit card balance go down each month until it is paid off. Follow your budget and save for purchases. No more impulse buying with the card.
Remember, people who don’t change their debt behavior end up in the debt cycle again. But if you’re focused and consistent with your budget, your consolidation will be a useful tool to eliminate your debt.
Have you consolidated your debt with a balance transfer credit card or loan? Tell us about your experience in the comments below.
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