GRAND RAPIDS, Mich. — Sometimes we get a little caught up and spend more than we would like. It may be because there was an emergency, a major life event, or just a shopping spree that got out of hand. Thankfully, there is a way to help you get that debt more under control and paid off. A balance transfer is when you move the debt on one credit card, to another one. This is usually done when opening a new card with a 0% or low interest introductory rate. This will significantly lower or even eliminate interest payments for a certain period of time. That can help you pay down the debt more quickly because you aren't adding costs in interest to the balance each month.
Nathan Grant, a Credit Industry Analyst with CreditCardInsider.com shared some insight with us on how they work, things to look out for, and the benefits of balance transfers.
First, decide where you want to transfer the debt to. Maybe you got an email letting you know you can take advantage of a balance transfer offer, or maybe you did some research and found a credit card that has a special offer that works for balance transfers. You may have to apply for a new credit card in order to do this. Once you decide, you need to verify the credit limit and available credit on the card you plan to transfer the debt to. Look out for any limits on how much you can transfer to the new card. If it doesn't help you meet your financial goals, it isn't the right fit.
Next you need to make sure you understand the terms of the new card. Every card has its own terms, limitations, and fees. Before opening a new card, make sure those terms fit with your situation and you know any limitations or fees that may be associated with it. But how much do you want to transfer? That will depend on how much debt you currently have on your credit card, and what the credit limit or available credit on the new card are. It will also depend on if there are any limitations to that card.
Once you have made the transfer, do your best to pay off all of the debt on the new card before the 0% or low interest rate period ends. Once that period is over, you'll be paying more in interest and you'll have lost your advantage to pay down the debt without paying large interest fees.
Here are a few things to keep in mind if you are thinking about a balance transfer.
Pay off as much of the debt on the new card as you can before the introductory period ends. This will eliminate, or greatly reduce the amount you end up having to pay to eliminate that debt. Grant recommends looking at the total balance and dividing it up by the number of months you have in the introductory period. Then set up automatic payments to make sure you never miss a payment deadline. "Even if you don’t set up enough, where the payments you are making are enough to have it paid off fully, even making a huge chunk of it without interest during that period can definitely help you down the line," Grant says.
The credit limit you will be allowed on any new card will always depend on your credit worthiness, which is measured by your credit scores. You may not get approved for a credit limit large enough to accommodate all of the debt you plan to pay off. "Just like applying for any credit card or loan, those are the factors that go into how much you are going to be able to get," Grant says. "That isn’t like, you know, totally bad news though because even transferring some of your debt to help you pay off without interest, even for a shorter time, or if it’s not the most competitive balance transfer offer, it’s still could help you save money on finance charges in the long run." If you don't have a great credit score, you may not be able to get a new card that has favorable balance transfer terms. If you won't benefit from a balance transfer, because you can't open a new card, or the introductory rate wouldn't be any better than your current card, don't do a balance transfer. Instead, consider other options, like credit counseling.
Something else to keep in mind, you won't be able to use two cards from the same company to do a balance transfer. "Regular balance transfers must be conducted between cards issued by two different credit card companies or between a credit card company and a lender," Grant says. "You won’t be able to transfer a balance between two cards from the same issuer."
You generally have a limited amount of time to do transfer a balance to a card with no fees or at a 0% interest rate. It's important to know how much time you have to get everything done.
"Applying for any new credit card whether it’s a balance transfer or not will nearly always result in a hard credit inquiry against your accounts, which may impact your credit scores slightly and temporarily," says Grant. "But, it should be a small sacrifice for the opportunity for being able to take care of your debt by using a balance transfer." Now, you may be tempted to close the old card you transferred the balance away from. However, it may actually benefit you to keep that card open. If there isn't any fees attached to it, keeping the card open is usually better for your credit scores by lowering your overall credit utilization ratio, which is the ratio of how much credit you are using vs how much total credit you have available. By keeping the card open and not spending on it, all of that empty credit having a positive affect on your ratio. If it helps, you can cut it up so you can't use it anymore, but it will still be open. Grant says it's key to "make sure that you are not spending on that card again, because then you are almost doubling your debt and totally defeating the purpose of why you might be getting a balance transfer card."
When you use a balance transfer to help pay down your debt, that doesn't need to be the only thing you are doing to get yourself in a more financially positive situation. Grant recommends using it in tandem with other repayment methods, like the avalanche method.
The Avalanche Method
Pay off your debts by tackling the loans or debts with the highest interest rate first. That will reduce the amount of interest you pay over time. Start by paying the minimum payment on your other debts and pay everything else you can toward the debt with the highest interest. It may take some time but you will eventually pay it off. Then, Take the money you were putting into that debt and put it toward the debt with the next highest interest rate. Keep going until all of your debt is paid off! Grant says "if you are using a balance transfer and you get a card that has a 0% APR period when you do the balance transfer, it’s helping you fight that high interest rate even more, so it really works well in tandem with something like that to help you tackle your debts."
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