How to Use a Balance Transfer Credit Card to Get Out of Debt

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The average American has $6,194 in credit card debt, according to Experian. If you, like many Americans, are paying the standard purchase rate on your debt — often near 18% — it will take considerable time to pay it off. For example, if your minimum payment is equal to 2% of your balance ($124 in the case of $6,200 debt), it would take 94 months, or almost eight years, to reach a $0 balance. However, that’s only if you don’t use the card for any new charges. The good news is that if you have been making your payments on time, you likely have a good credit score. If so, banks will compete for your business and the balance you carry. Banks and credit card issuers may even offer you a 0% annual percentage rate, or APR, on credit card balances you have if you open a new credit card with them and transfer the balance over. An opportunity to pay 0% APR on the balance you’re carrying is not one to miss. With such an offer, you can eliminate high-interest debt for good. Read on to find out how to use a balance transfer credit card to get out of debt.

What Is a Balance Transfer Credit Card?

Essentially, a balance transfer is a process in which you move debt, such as a credit card balance, from one credit card to another credit card. A lower interest rate on the receiving credit card will reduce how much  money you pay in interest  on your debt, versus leaving the balance on the original, higher interest rate credit card. A credit card advertised as a balance transfer credit card is typically one that offers incentives related to completing balance transfers. For example, most balance transfer credit cards will have an introductory period in which the issuer charges 0% APR on balance transfers — typically for 12, 15, 18 or 21 months. So, when you transfer a balance from a high APR credit card to this new balance transfer credit card, you can then pay down your balance with no interest within the introductory period. Balance transfers can be an excellent opportunity to reduce a large amount of debt more quickly than if you had to pay interest on top of the principal owed. Balance transfer credit cards with 0% APR introductory periods usually come with terms. Here are some to consider:

  • Eligible transactions:  Some cards apply the offer only to balance transfers while others provide for interest-free purchases.
  • Window to make balance transfers:  Balance transfers typically have to be completed in the first few months of opening the new card.
  • Interest-free period duration:  Introductory periods, where interest isn’t charged on the balance, typically range from 12 to 24 months.
  • Whether delayed interest applies:  Delayed interest means if you don’t pay off the amount before the introductory period is over, you could be hit retroactively with “back interest” on the remaining balance.

How Do 0% APR Cards Help With Debt?

It’s easy to understand that not having to pay interest is a way to save, but it’s also important to understand how the balance transfer process works before you apply for a credit card with this feature.

  1. Read the terms and conditions. Balance transfer fees can range from 0% to 5%, and you need to be prepared for any charge.
  2. Choose the credit card you want, which could be the one with the longest 0% duration or the lowest fee. Or it could offer a nice cash-back bonus when opening the card.
  3. If possible,  apply for a balance transfer credit card  online through the link. Make sure to list the cards with the balances you want to transfer to the new card. This has multiple benefits:
    • The balance will move to 0% as soon as possible.
    • Banks want to win balances from other banks.
    • Banks might increase your credit limit to gain all of your business.
  4. Make all payments on time; late payments may trigger an end to the 0% or a late fee.
  5. Enjoy the fact that every cent of every payment made lowers your balance.

When you reduce your outstanding balance as much as half or more, your credit utilization ratio will decrease. A lower credit utilization ratio is ideal in the eyes of credit card issuers, which will increase your credit score and make you more creditworthy.

When Should You Consider a Balance Transfer?

A balance transfer can be a powerful ally in reducing debt. But how can you recognize when you should do a balance transfer? Here are some typical situations in which a balance transfer to reduce debt makes sense:

  • You’re carrying debt with a high interest rate:  A balance transfer could save you money by moving debt from a high-interest-rate credit card account to a lower-interest-rate account.
  • You’re juggling multiple payments each month:  You could potentially use a balance transfer credit card to consolidate debts, so you’ll have fewer monthly payments to track and manage.
  • You get a promotional offer on a balance transfer credit card:  An introductory 0% APR on balance transfers could help you pay down your debt faster by reducing the amount of interest you pay on the transferred balance.

Use Balance Transfer Cards To Get Out of Debt

Balance transfer cards can be a powerful tool in your debt-management repertoire. They let you attack credit card debt head-on via popular snowballing methods without paying more interest than you have to. And sometimes, that means no interest at all. Here’s what using a 0% APR balance transfer can do for your debt.

Pay Down Debt Faster With Balance Transfer Cards

When you utilize balance transfer credit cards with very low or no interest, you can pay down your debt faster. With little to no interest, everything — or almost everything — you pay toward the balance will go toward the principal. Here’s a look at how the amount of interest makes a big difference in how fast you can pay down just one balance. If you have the average American’s credit card balance of approximately $6,200, and you want to reduce it by half, it’s far easier with a 0% APR period. It would only take $172 a month for 18 months — a typical 0% APR intro period length — to cut that $6,200 balance down to around $3,100. And every single cent would go toward the principal. However, if you were to attempt the same payments with an 18% APR, it’d take you 22 months — or four months more — to decrease your balance to around $3,100. Plus, you would pay $684 in interest charges. From these examples, it’s easy to see that transferring the balance from a credit card with a high, or even average APR, to a 0% APR introductory balance transfer card can provide big savings that you can invest or add to a savings account.

Snowball Debt With a Balance Transfer Card

Take the above scenario and consider what else you could do with the $684 in interest charges that a 0% balance transfer could save you. For example, you could pay down another debt or make payments on a different credit card balance before additional interest can accrue it. In short, with a balance transfer card, the same amount of money covers more of your debt. You can use this savings from balance transfer to gather momentum and eventually reduce all your outstanding debt.

Balance Transfer Fees Explained

As long as you do your research and follow some best practices, there’s really no catch or major downside to balance transfers. It is important to note, however, that a balance transfer fee often applies that’s equivalent to a percent of the amount transferred. Here’s what you need to know about the fine print of credit card balance transfers:

  • Most cards do charge a balance transfer fee of 3% to 5% of the total amount being transferred. For the $6,200 example above, the fee could be $186 to $310. That’s still much less than the interest you would pay on a high-balance card over time, however.
  • Some offers truly are no interest for the introductory period, which means if you don’t pay off the balance, regular interest just starts accruing at the applicable time.
  • Other cards have what is called deferred interest, which means if any balance is left after the introductory period, you’ll be hit with months’ worth of interest at one time. While you will ideally pay off the transferred balance within the introductory period, it’s still a good idea to know which type of interest charges apply.
  • The balance transfer tip only works if you can pay off the balances within the interest-free period without adding new credit card debt to the mix. You certainly don’t want to clear a high-interest card by moving the balance only to start charging on it again.

The Bottom Line

Using balance transfer cards to pay down debt is one of the more effective methods of debt reduction when done correctly. The right introductory offer can minimize how much you pay and make your debt easier to manage. Plus, when you use a 0% APR balance transfer period strategically, you can build momentum to keep your debt reduction going. Just be sure to do your homework, read all the fine print, pay attention to fees, develop good credit habits and follow best practices to make it happen.

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