4 ways a balance transfer can cut your debt
By Allie Johnson
January 20, 2016
If you’re battling a debt hangover — or just dealing with a mountain of credit card bills — a balance transfer card deal may help.
When used correctly, credit card balance transfers allow you to temporarily escape high interest rates, get out of debt faster and streamline your accounts so you run less risk of making a mistake or falling into a trap, financial experts say.
But do the math first: Many 0 percent interest or low-interest balance transfers have a balance transfer fee, typically between 3 and 5 percent of the balance being transferred. Also, be sure to pay off the balance before the introductory period ends — otherwise your interest rate on your new card and your monthly payments will rise. Late payments, too, could cost you that sweet 0 percent interest rate, the Consumer Financial Protection Bureau notes.
Here are four ways a balance transfer can help you get out from under a load of debt:
1. Pay off debt faster
Look for a balance transfer offer with a long enough 0 interest period to let you comfortably pay off your debt within that time period.
It’s not uncommon for consumers already in debt to add almost $1,000 over the holidays, says Nick Clements, founder of the Magnify Money personal finance blog, making a balance transfer offer particularly appealing now. If you spent about that much on a credit card with 20 percent APR on purchases, and you pay $100 a month on that card, you won’t be debt-free until after you have rung in the next New Year.
Compare 0 percent balance transfer cards, and you could trim a few months off your debt repayment, he says, and save on interest charges as well.
Debt payoff tip: Most balance transfer offers have an introductory period of 12 or 15 months, says Harlan Luke Landes, founder of the personal finance blog Consumerism Commentary. An introductory period of 18 months is ideal if you can get it, says Linda Sherry, director of national priorities for the consumer advocacy group Consumer Action. Even better: A few cards offer 21 months with no interest. Oftentimes, you ‘ll need a fairly good credit score to qualify for those kinds of deals though.
2. Corral debt from multiple cards
Did you charge clothes, gadgets and housewares on multiple retail cards to ring up discounts or rewards at the checkout counter? You might be grappling with the headache of trying to juggle payments on all those cards (and not incurring late fees caused by forgetting a payment).
“Check the terms carefully.”
— Linda Sherry,
consumer advocacy group
With retail cards, you’re likely paying higher interest rates. A 2015 CreditCards.com survey found the average retail card APR was 23.43 percent — much higher than the national average for all credit cards (15 percent). By transferring multiple high-interest balances onto a 0 percent balance transfer card, you could save big time on interest charges.
Debt payoff tip: If you’re planning to apply for a new balance transfer card, call customer service first to make sure you’ll be allowed to transfer multiple small balances from retail cards onto the new card, Sherry says. “They might say, ‘Sure, just give us the account numbers and we’ll transfer them,’” she says. If not, you could use balance transfer checks that might arrive in the mail from one of your current card companies, she says. If you do use balance transfer checks, know that you might be forfeiting your grace period on purchases while you’re carrying the balance transfer debt on that card, she says. In other words, if you make purchases on that card, interest would start accruing immediately.
3. Don’t jeopardize that 0 percent interest.
Once you have that 0 percent interest for several months, you don’t want to lose it.
If you make a late payment, miss a payment or otherwise run afoul of your agreement with the company, you risk losing that plum deal. “Check the terms carefully,” Sherry says.
Debt payoff tip: If you can’t transfer the balance directly onto a new card, you can use a balance transfer check from your credit card company, Sherry says. If you haven’t received any balance transfer checks in the mail lately, call your current card company and ask if they have any balance transfer offers, she says. And to avoid late fees, don’t forget to set up email or text alerts through your card issuer to make sure you pay your bills on time.
4. Put your balance transfer savings to good use
The more debt you have, though, the bigger difference a 0 percent balance transfer deal can make, Clements says.
For example, if you have a $10,000 balance at a 15 percent interest rate and pay the minimum due (defined as 1 percent of principal balance and accrued interest), you would end up spending $1,420 of interest over the next 12 months.
If you transferred that to Chase Slate, for example, Clements says, which has no balance transfer fee for the first 60 days and no interest for 15 months, you would be saving the interest expense — which is well over $1,000.
Clements adds, though: “I would hope that the individual would use that extra money to pay down the balance faster, rather than keeping the money in their pocket.”
Debt payoff tip: Look at how much you spent on the holidays this year and start planning for next year now, Landes says. If you’ve got a 0 percent balance transfer card, tuck the money you’re saving on interest each month into a designated savings account or emergency fund, he says. “You’re taking this habit you’ve formed and making it benefit you instead of the credit card company,” he says.