Editorial Policy

Balance transfer may be the cure for this large balance

Erica Sandberg

December 23, 2014

QHi Erica,

My Wells Fargo credit card is at $9,000 and my credit limit is $10,000. I am not using it anymore because I really (really!) am trying to pay it off. I have $500 a month auto deducted from my banking account, but my interest rate is 29 percent, so I am not making much progress. It is my one and only card. Should I do a balance transfer? I see zero percent  deals. My credit is pretty good, I think. Thank you in advance. –Mavis

ADear Mavis,

A balance transfer might be a terrific option for you, as the savings both in money and time could be considerable.

For example, perhaps you get a balance transfer deal of zero percent for one year, and then 10 percent APR after that. Although the new creditor may add 4 percent (around $360) of the balance you're moving over, you would still save $2,250 in finance fees during the promotional period alone. Each month after that, you'd save an additional $143.Ask Erica

Yes, I do think it is wise to check out the deals, however; the scenario I described is one of the better ones. The cut-rate promotional periods for some are only six months (and others even less) and not all waive the interest entirely. Pay close attention to the post-promo rate, as well. Ten percent is great if you can get it, but other cards hike the rates much higher.

Don't assume that your credit rating is so great that you'd qualify for these fantastic deals, though. It may not be, as your debt is very high in relation to your credit limit. Check your credit scores at MyFICO.com for about $20 per score. FICO's scale is 300-850, with 850 as the best. If your score is in the mid-700s or above, apply for cards that require excellent credit. Good credit is in the lower 700s. Below that, and your options are limited.

In that case, you may want to look at your credit reports for free at AnnualCreditReport.com to see how you can boost your credit rating. Check for errors or other opportunities to raise your credit score (such as opening a new card and lowering your overall credit utilization ratio by adding another credit line, for example).

If you do get a new balance transfer card, always pay on time. I love that you're having your payment automatically withdrawn from your checking account right now, because doing so should prevent skipping a payment cycle. Arrange the same for the new card, as a low promotional rate usually disappears after even one delinquency.

Also, be sure to not get into any further debt with the new or the now-empty card. Your current creditor won't close the account when you do a transfer. I've seen many people start to charge with their zero-balance card after a transfer. Then what happens? They have two accounts with debt and fewer options for resolution.

Ideally, make one small charge on the zero-balance card and pay it off in full each month. This will keep the card active and boost your credit score further, because you will have the second card — and additional limit — which is bound to lower your credit utilization ratio. The ratio should stay under 30 percent of the limit for all of your cards. For example, if you have a $20,000 limit, and owe $5,000, your ratio is 25 percent. The ratio is an important part of the FICO scoring model, which lenders track to evaluate your creditworthiness.

Before you decide on a new creditor, though, contact Wells Fargo and explain what you want to accomplish. Most issuers want to keep their better customers happy. Ask what the bank can do for you. Maybe it will drop the interest rate considerably. Then, you won't have to go through the trouble of finding a new creditor, shifting the money and paying a transfer fee.

So here's another scenario for you:

Let's say that Wells Fargo agrees to reduce the rate to a fixed 10 percent. It would then take 20 payments of $500 to be debt free, which would be four months fewer than at the current APR. If you can increase the payment to just over $750, however, you'd be in the black in about a year! The sooner you delete this obligation, the better off you'll be, so I encourage you to pay extra if you can.

After that, you can make plans for what you'll do with the money that you won't have to send to a creditor. It could go into a savings account for emergencies or at least a portion can go toward those things you've been putting off, like vacations and clothes. If you're as committed to debt repayment as you are to goal achievement, you'll be living the high life soon!

Finally, all that positive credit activity will be reflected on your reports and factored into your scores. By the time you send your last payment, your rating should be even better than it is now. That means if you want to finance a home, car or get a credit card with the best terms, you should be more than eligible.

Got a question for Erica? Send her an email.