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Is one of your financial goals to get out of debt? If so, opening another credit card could be the worst – or best – option you have. Personally, I used this strategy to help me knock out over $26,000 in credit card debt.
As we all know, credit cards carry exceptionally high-interest rates. According to the Federal Reserve, the average interest rate on credit cards is 16.61% (for cards that assessed interest in Quarter 1 of 2020). High rates can quickly escalate your debt, wreak havoc on your monthly budget, and derail your long-term financial goals.
However, if you’re sinking under a significant amount of credit card debt, getting another card could be a smart move. But there is a catch. You should only open a new credit card in this situation if you plan to use it for the sole purpose of a balance transfer.
If you’re the right candidate, a balance transfer can help you get out of debt faster while also giving you some relief from the high interest you’re paying now. Let’s take a look at how a balance transfer works and whether it’s the right move for you.
What is a Balance Transfer?
A balance transfer is a way to refinance your credit card debt. With a balance transfer, you move debt from your high-interest cards to a lower or 0% interest card.
A balance transfer credit card is like any other credit card, except it comes with a very low or 0% introductory rate that typically lasts for several months. You can save hundreds of dollars in interest because of this low or 0% introductory rate.
Depending on the balance transfer offer, you might be able to move your existing debt to a new credit card account with minimal or even no fees. (Tip: Look for an offer with no balance transfer fees or low balance transfer fees to amplify your savings potential.) Once you’re no longer paying high-interest rates, you can make faster progress by putting the money that was going toward interest into paying off the actual debt.
Why a Balance Transfer Might NOT be Right for You
A balance transfer isn’t a good idea for some people. For example, if I had opened a new balance transfer card before I started my budgeting journey, I might have created more problems for myself instead of solving the debt problems I already had.
Before you apply for a new balance transfer credit card, it’s important to consider the following.
- First, you have to be committed to getting out of debt for a balance transfer. If you’re tempted to continue using your existing cards after transferring your balances to a new account, a balance transfer will spiral you into more debt. You must be ready to eliminate your credit card debt, or a balance transfer is a bad idea.
- Second, you may not qualify for a balance transfer card with an attractive promotional interest rate right now. Even if you’re pre-approved for the card, that doesn’t mean you’re approved for the 0% interest rate. Most credit card issuers require you to have a good credit rating to qualify for a balance transfer card. So, your FICO Score should be at least 670 and maybe higher depending on the card issuer.
If your FICO Score is below 670, you are considered a subprime borrower. You’ll likely struggle to qualify for a balance transfer card. Even if you do manage to qualify, the card issuer may not give you a credit limit that’s high enough to make a difference.
- Third, if you have less than $1,000 in credit card debt, you may benefit more from choosing a debt payoff strategy and paying off your cards without a balance transfer. On the other hand, if you have a lot of credit card debt — say, more than $8,000 — a personal loan might be more cost-effective in the long run.
- Fourth, beware of transferring your balance to skip a credit card payment or to put off paying interest. Using balance transfers this way could put your financial security in jeopardy. Balance transfers also take time. So, you might still need to make your minimum payment to avoid being late while you wait for a balance transfer to process.
- Finally, serial balance transfers aren’t a good idea either. Moving your balance every 12 to 18 months merely postpones the inevitable and might damage your credit score. If you can’t afford to make your credit card payments, you need to explore other available options.
However, let’s look at what you need to know before you apply for a new balance transfer card for those of you who are committed to eliminating your credit card debt.
What You Need to Know about a Balance Transfer
The most important aspects of making a balance transfer are finding a credit card with:
The lowest possible APR.
Many credit cards offer special introductory rates, often as low as 0%. Read the fine print to determine if the card issuer offers what you need. Also, choose a card from a different issuer than any of your current cards. Many card issuers won’t allow you to transfer balances between their own cards.
The lowest possible balance transfer fee.
Balance transfer offers often come with balance transfer fees. This fee is the amount the card issuer charges you to move your money to the new account. For example, if a card issuer charges a balance transfer fee of 5%, it would cost you $500 to transfer $10,000 worth of debt (making your new balance $10,500).
Usually, you can save more money with your low promotional interest rate than you pay in balance transfer fees. Still, finding the lowest balance transfer fee available could boost your savings potential. A 0% balance transfer fee is best (though sometimes hard to find), but even a 2% or 3% balance transfer fee may be a good deal in the long run.
The longest time period for this introductory rate.
Many balance transfer offers feature promotional interest rates that last between 12–21 months. The longer the low-interest rate applies, the more time you have to pay off the debt before the standard interest rate kicks in again. (Tip: Make sure the introductory rate applies to balance transfers before you apply.)
No annual fee.
Credit cards with annual fees sometimes feature tempting perks. For example, if you’re a frequent traveler, you might get enough value from a travel credit card to outweigh its annual fee. However, if your goal is to eliminate your credit card debt as quickly as possible, getting a card with an annual fee can work against you. Use a balance-transfer calculator to estimate the cost of the new rate and fees (annual and balance transfer) versus your current interest rate. If you’re trying to get out of debt, a no-annual-fee card is usually best.
An adequate credit limit.
There are two important reasons you want to get the highest credit limit possible when you open a new balance transfer credit card. First, you need a credit limit that’s large enough to pay off your existing credit card debt. A small credit limit might not do the trick.
Second, a higher credit limit might improve your credit score. A large percentage of your FICO Score is based on credit utilization — the amount of credit card debt you carry versus your available credit limits. When you add a new card with a high credit limit to your credit reports, it may cause your overall credit utilization ratio to drop. A lower credit utilization ratio is typically good for your credit score.
Other Important Considerations
All Debt is Not Equal
It’s possible that one of your current credit cards may offer a low or 0% APR on balance transfers. While it may seem like an easy option to move all of your credit card debt onto a card you already hold, there are some potential negative factors you should consider first.
For example, if you already owe a balance on an existing card before you transfer debt over from another card, the two balances (original and balance transfer) aren’t treated equally.
- Minimum Payments: When you make your minimum monthly payment, the total amount goes toward the balance with the lowest APR. So, your high-rate debt continues to accrue the highest interest rate without being paid down.
- Additional Payments: Any payment you make above the minimum amount due is applied toward the balance with the highest interest rate. As a result, your transferred debt will accrue interest unless your balance transfer offer features a 0% APR.
Don’t Let the Time Run Out
Finally, for a balance transfer to be most effective, you should pay off the full debt during the low-rate promotional period. The whole point of a balance transfer is to eliminate or reduce your interest rate so you can pay off your credit card debt as soon as possible.
If you aren’t able to pay off the debt before the promotional APR period ends, you might be subject to an even higher interest rate than you paid originally. In the case of deferred-interest financing, you could even be subject to back interest.
Before making the final decision, use a credit card payment calculator to determine how high your payment needs to be to eliminate the debt during the promotional period. You need a monthly payment amount that will pay off the debt before the promotional rate ends, but also one that you can afford. (Tip: A longer promotional period can help you here.)
How to Treat a New Balance Transfer Card
Once you find the right card and manage your balance transfer well, it’s only a matter of time before your current high-interest credit card debt is no more. After you pay off your debt, you’ll need to decide what to do with your new account.
If the card has an annual fee or if the temptation to use it is too high, your best option may be to close the account. However, there are more pros than cons when it comes to keeping the card open and active.
If you are enjoying the newfound discipline that comes with financial responsibility, keeping the card open gives you a greater line of credit. More available credit can be a plus for your credit score. And good credit is an asset that can help save you money both now and in the future.
A Balance Transfer Can Be a Lifesaver IF
A balance transfer can be the lifesaver that helps you climb out of credit card debt once and for all if you manage it well. The key to being successful is to stop using your existing cards while working to pay off your debt. Most of all, you need to commit to stop charging more on your credit cards than you can pay off each month.