Are you struggling to pay your credit card debt? Perhaps, you are considering a balance transfer credit card to help you pay off your debt faster?
If so, you’re not alone. In fact, the Federal Reserve reports the average American family owes $38,000 in personal debt, not including home mortgages.
It may be tempting to transfer the balance on your credit cards to a no-interest balance transfer credit card. But should you?
Keep reading to discover if a balance transfer credit card is a good idea or not, as well as five easy steps to do it the right way.
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, onto one low-interest card. Some balance transfer cards even have zero percent interest introductory offers 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 strong 0% interest introductory period and low or no transfer fees generally requires credit scores 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 of their credit card debt due to high-interest rates. Instead of paying multiple high-interest payments each month, you can make one low-interest payment.
- People who are aggressive about eliminating their debt. Assuming you are paying out less each month, you would need to apply the extra money in your monthly budget towards the principal on your debt.
Who Should Not Get a Balance Transfer Credit Card?
- People with low credit below 670. It would be a better idea to get a personal loan with a low-interest rate. If the rate is much lower than your credit cards, it will likely be worth it to transfer the cards to a consolidation loan with a set term such as 1-3 years. Even then, apply extra money in your budget from the reduced payment towards the principal to pay off the loan faster.
- People who will not pay down the principal during the introductory period. If you can only pay the minimum payment and not put any extra towards the principal, then you’ll only be making your credit problem worse once the introductory period is over. Consider a low-interest personal loan with a fixed rate instead. We recommend Lending Tree to find the best rates, and they do a soft credit pull so your credit score won’t get dinged.
- People who can’t stick to a budget and will rack up more debt. If you’re just treading water or, worse yet, racking up more debt, then your debt is only going to balloon even more, especially when the introductory period is over and the higher interest rates kick in.
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 – This is 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 can now go towards the principal.
- Transfer maximum – 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 left over.
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, make 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 down aggressively.
- Personal loans. 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.
If you relax, you’ll be back in the hole before you know it.
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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