When youâ€™re buried under a pile of debt, youâ€™ll need to go beyond making the minimum payments if you hope to get debt-free as quickly as possible. And with interest rates on an upward swing, it may not be something you can afford to ignore.
This is where balance transfer credit cards come into play. Once you understand how they work, they can be a powerful tool that lets you temporarily pause your interest payments â€” and chip away at your principal balances faster.
MagnifyMoney tapped the experts to unpack everything you need to know about balance transfers. Hereâ€™s how to master the ins and outs of one of the most effective debt repayment options available.
Itâ€™s all in the name. A balance transfer involves taking one or more credit card balances and transferring them to a different card that has a lower interest rate. The ideal situation is to roll everything over to a card that has a 0% APR promotional period. This essentially eliminates the interest for a set period, giving you a chance to catch your breath and, if all goes according to plan, pay off the balance before the interest kicks in.
To pull off a balance transfer, you can either open a new low- or no-interest credit card, or look to your existing cards that youâ€™ve already paid off to see if there are any deals to be had. According to David Metzger, a Chicago-based certified financial planner and founder of Onyx Wealth Management, it isnâ€™t uncommon to find 0% interest rate promotions on your existing cards.
â€śIf youâ€™ve got multiple cards, chances are you get offers like that all the time,â€ť he said.
If not, donâ€™t be afraid to reach out to your credit card companies to see if they have any deals up for grabs. If they donâ€™t, or you donâ€™t have the credit capacity on your existing cards, you can shop online for a balance transfer card.
As for the promotional introductory period, it varies from offer to offer, with the best rates and terms generally going to those whoâ€™ve got excellent credit. Those with a minimum credit score of 680 can expect transfer periods that last anywhere from 12 to 21 months. Keep in mind that some offers tack on a balance transfer fee to the tune of 0% to 4%, so it pays to read the fine print.
Temporarily eliminating your interest rate can translate to pretty significant savings. Letâ€™s say you have the following open balances, and you pay $100 per month on each:
If you stay on this path, youâ€™ll shell out $500 in interest and get out of debt in 24 months. But a balance transfer with 0% APR for 15 months will keep that $500 in your pocket. Your monthly payment wonâ€™t change, and youâ€™ll also pay off the balance nine months faster. From a numbers-and-sense perspective, itâ€™s a no-brainer.
â€śYou can save a ridiculous amount in interest payments, but the name of the game is to more or less come close to paying the balance off completely before that transition over to that higher interest rate,â€ť Lucas Casarez, a Fort Collins, Colo.-based certified financial planner and founder of Level Up Financial Planning, told MagnifyMoney.
As Metzger mentioned, turn first to any existing credit cards that can absorb some new debt. Are there any balance transfer offers available? If not, the best place to search and compare balance transfer offers is online. According to Casarez, the following factors play the biggest role in the kinds of deals for which youâ€™ll be eligible:
He adds that folks in retirement, for example, may have a tougher time qualifying for a worthwhile balance transfer since their money may come more from retirement accounts rather than Social Security or pensions. Casarez does clarify, however, that credit card companies typically want to approve you.
â€śThese banks make a lot of money the longer that your current balance is at a higher interest rate,â€ť he said.
If youâ€™re looking to save money and get out of debt faster, balance transfers are a powerful weapon to have in your arsenal â€” if you know how to use them wisely. Hereâ€™s what to consider before giving it a go.
This strategy wonâ€™t work if you donâ€™t get to the root of why youâ€™re in debt to begin with. What kinds of purchases make up the bulk of your existing credit card statements? Whether theyâ€™re living expenses, splurges or surprise pop-up bills, itâ€™s time to revisit your budget to prevent falling into the same patterns again. After your balance transfer is complete, seeing $0 balances on your old credit cards can create serious temptation.
â€śIf you donâ€™t have a plan, balance transfers may be something that allow you to spend even more money, so it could put you further into the hole,â€ť Casarez said. â€śItâ€™s like a hot potato youâ€™re passing around, but thereâ€™s going to come a day when you have to pay up.â€ť
Having emergency savings on hand provides an additional safety net because you wonâ€™t need a credit card to see you through your next unexpected bill. Our insiders recommend building a $1,000 mini-emergency fund while youâ€™re paying off debt.
Once your budget and emergency fund are in shape, itâ€™s time to shop around online for balance transfer offers. Ones with the lowest transfer fees and longest 0% introductory periods are the best, but hereâ€™s the catch: This strategy only makes sense if you can pay off the balance before that period ends, at which point youâ€™ll be slammed with interest charges on the remaining balance.
Standard interest rates after the introductory promo period ends are generally higher than other credit cards. And if you miss a payment, the credit card company may cancel your promo period.
Opening a new balance transfer card requires a hard credit inquiry, which will result in a short-term dip in your credit score. Your score may also take a small hit if the transfer itself uses up more than 30% of your new credit line. (How much you owe accounts for 30% of your FICO score.) But Metzger said it may be worth it if youâ€™re ultimately eliminating high-interest debt faster.
â€śYour score will improve much faster than it would have had you not engaged in the strategy,â€ť he said. â€śYou take a small step backward for a huge step forward, if youâ€™ve got the discipline to do it.â€ť
Metzger does suggest using caution with balance transfers if you plan on financing a big purchase, such as a mortgage or car, within the next month or two. Depending on your financial health, slight fluctuations in your credit score could prevent you from getting the best interest rates on these purchases.
If a balance transfer isnâ€™t in the cards for you right now, there are still plenty of viable ways to get out of debt as quickly as possible. Here are a few tried-and-true debt repayment methods you can put to use today.
The debt snowball approach prioritizes your lowest balance first, regardless of your interest rates. You make the minimum payments on all your debts while hitting the lowest balance the hardest with any extra income you can spare. Once itâ€™s paid off, you take whatever you were spending there and roll it over to the next lowest balance. Keep on chugging along until all your balances are paid off.
â€śThe nice thing about the debt snowball, and the reason that it tends to be the most effective way, is that you start to have those wins a lot faster when youâ€™re focusing on those smaller balances,â€ť Casarez said.
â€śYou start to build up some momentum and confidence,â€ť he added. â€śAs you do that, you start to get a little bit more swagger and feel like youâ€™re actually making progress and have more control over your financial situation than you thought.â€ť
This strategy puts your highest-interest balance above all others. When you compare it to the debt snowball method, itâ€™s the fastest and cheapest way to get the job done, which is why Metzger said it makes the most sense.
â€śWith that being said, people are quirky,â€ť he added. â€śIf paying down the lowest balance and snowballing it that way works for you, then by all means do it. The outcome is far more important than the path you take to get there.â€ť
Another way to tackle your debt is to consolidate it using a personal loan. Once you receive the loan amount, you use the funds to pay off all your debt, at which point youâ€™ll have one new balance and monthly payment. This strategy is ideal for those who can lock down a lower interest rate. Whatâ€™s more, personal loans often have fixed rates, monthly payments and repayment timelines, so it makes budgeting a whole lot easier.
And since itâ€™s a lump-sum installment loan â€” not a revolving credit line in which you can charge and pay off as you go â€” using it to eliminate credit card debt should boost your credit score because youâ€™re effectively using less available credit. Some personal loans do come with an origination fee, typically between 0% and 6%, so do the math to see if itâ€™s the right debt consolidation method for you.
When shopping for a debt consolidation loan, itâ€™s best to compare your option to make sure you get the one with the lowest interest rate. LendingTree, the parent company to MagnifyMoney, allows you to compare up to five lenders without affecting your credit score. Use our table below to get the best results!
It all depends on your situation. If youâ€™ve got a solid credit score and qualify for attractive balance transfer offers, itâ€™s worth exploring â€” as long as you donâ€™t charge new debt and youâ€™ve got a plan in place for paying off the balance before the introductory period ends. When done right, balance transfers are great shortcuts that could save you a significant amount of time and money in the long run.
The debt snowball and avalanche methods are worthwhile alternatives for those who prefer to get out of debt the old-fashioned way. Meanwhile, a debt consolidation loan could pave the way for a locked-in lower interest rate. The main takeaway here is that you have multiple debt repayment options at your fingertips. Theyâ€™re all, as the old saying goes, â€śDifferent paths up the same mountain.â€ť
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By clicking â€śSee Offersâ€ť youâ€™ll be directed to our parent company, LendingTree. You may or may not be matched with the specific lender you clicked on, but up to five different lenders based on your creditworthiness.
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