Using Balance Transfer Cards to Dig 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. We detail how balance transfer cards help you dig out of debt below.
Paying Down Debt Faster With Balance Transfer Cards
Balance transfer cards let you pay down debt faster because everything you pay toward the balance goes toward principle. Let’s take a look at an example to see how the amount of interest makes a big difference in how fast you can pay down just one balance.
Imagine you have a credit card with a balance of $6,000 and an interest rate of 18 percent.
With a 0 percent balance transfer card offer with an introductory period of 15 months, you have 15 months to pay off the balance before interest is charged on it. That means you could pay $400 a month on the transferred balance, paying it off within 15 months.
In contrast, if you keep the balance on your original credit card and pay only $400 a month, it will take you 18 months to pay down the balance. That’s another $1,200 in payments, including $848 in interest alone.
Snowballing Debt With a Balance Transfer Card
Take the above scenario and consider what else you could do with the $1,200 you saved via the balance transfer. You could pay down another debt or make payments on a different credit card balance before additional interest can accrue on that. In short, with a balance transfer card, the same amount of money covers more of your debt.
But, What’s the Catch?
We love balance transfer cards because as long as you do your research and follow some best practices, there’s no catch. Here’s what you need to know about the fine print.
- Most cards do charge a balance transfer fee of 3 to 5 percent of the total amount being transferred. For the $6,000 example above, the fee could be $180 to $300. That’s still much less than the interest you would pay on a high-balance card over time.
- 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 we hope you’ll pay off the transferred balance within the introductory period, it’s a good idea to know which of these you’re dealing with.
- 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.
We love the idea of using balance transfer cards to dig out of debt. The right introductory offer can minimize how much you pay and make debt easier to manage. But you do have to follow best practices to make that happen.