Using Balance Transfers to Pay off Debt
Nobody graduates college and says, "I'm going to get into thousands of dollars of credit card debt." But unfortunately, that exact thing happens every day. Life happens. Emergencies pop up. Suddenly, that little piece of plastic starts to feel like an anchor, dragging you deeper into debt with every swipe.
If you're nodding along, know that you’re not alone. And more importantly, there’s a way to alleviate some of that pressure: balance transfers. Today, we're diving into the ins and outs of balance transfers—what they are, when you might consider one, what to look for in the fine print, and other key things to know.
What is a Balance Transfer?
A balance transfer involves moving your existing credit card debt (with its high interest rate) onto a new credit card that offers a 0% intro APR for a certain period, typically 15-18 months. This means you won't accrue any interest on the transferred amount during the promotional period, giving you a chance to pay down the principal without the interest piling up.
When to Consider a Balance Transfer
High-Interest Debt: If your current credit card carries an interest rate of 20-30%, a balance transfer could save you a significant amount in interest payments.
A Solid Repayment Plan: If you have a plan to pay off the debt within the 0% APR period, a balance transfer can help you tackle your debt more efficiently.
Good Credit Score: Balance transfer cards often require a good credit score. If you’re in a good credit standing, you’re more likely to qualify for these offers.
What to Look Out for in the Fine Print
Balance Transfer Fees: Most cards charge a balance transfer fee, typically 3-5% of the amount transferred. Do the math to ensure the savings outweigh the fees. You don’t want to find yourself paying more for the transfer than you would have for the accrued interest.
Length of the Intro Period: Look for the longest 0% APR period available, ideally 15-18 months, to give yourself ample time to pay off the debt.
Regular APR After the Intro Period: Know what the interest rate will revert to after the promotional period ends. If you haven’t paid off the balance by then, you could find yourself back in a high-interest situation. Additionally, make sure the card you’re looking into is not deferred interest or you’ll be in a world of hurt if you don’t pay the balance by the end of the promo period.
Payment Timeliness: Missing a payment could void the 0% APR offer, causing the interest rate to skyrocket. Make sure you can commit to making at least the minimum payment on time every month.
Other Things to Know
Impact on Credit Score: Applying for a new credit card will result in a hard inquiry on your credit report, which can temporarily lower your credit score.
Limitations on Transfer Amounts: Some cards may have limits on how much you can transfer, often tied to your credit limit on the new card.
Not a Cure-All: While balance transfers can be a great tool, they’re not a solution to ongoing overspending. It’s crucial to address any underlying issues that led to the debt in the first place.
Where to Look: My go-to for most financial related topics is NerdWallet. Every month they have a new article with that month’s “best” balance transfer credit cards, so that’s the first place I would look when trying to find a good one.
The Bottom Line
Balance transfers can be a powerful strategy to tackle high-interest credit card debt. They offer a window of opportunity to pay down your balance without the burden of accruing interest. However, they come with their own set of rules and potential pitfalls. By understanding when to consider a balance transfer, reading the fine print carefully, and having a solid repayment plan in place, you can make a significant dent in your debt and move toward financial freedom.
What do you think? Will you consider a balance transfer?
