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Updated on Monday, April 22, 2019
When you’re buried under a pile of debt, you’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 — and chip away at your principal balances faster.
MagnifyMoney tapped the experts to unpack everything you need to know about balance transfers. Here’s how to master the ins and outs of one of the most effective debt repayment options available.
What is a balance transfer?
It’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 you’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 isn’t uncommon to find 0% interest rate promotions on your existing cards.
“If you’ve got multiple cards, chances are you get offers like that all the time,” he said.
If not, don’t be afraid to reach out to your credit card companies to see if they have any deals up for grabs. If they don’t, or you don’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 who’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.
How balance transfers can save you money
Temporarily eliminating your interest rate can translate to pretty significant savings. Let’s say you have the following open balances, and you pay $100 per month on each:
- $1,000 with 18.00% APR
- $2,000 with 16.00% APR
- $800 with 20.00% APR
If you stay on this path, you’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 won’t change, and you’ll also pay off the balance nine months faster. From a numbers-and-sense perspective, it’s a no-brainer.
“You 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,” Lucas Casarez, a Fort Collins, Colo.-based certified financial planner and founder of Level Up Financial Planning, told MagnifyMoney.
Applying for a balance transfer credit card
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, one of the best places 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 you’ll be eligible:
- A good credit score: You won’t qualify for much if your credit score is below 680. At the time of this writing, the longest promo periods with 0% interest were reserved for this bunch. Why? A lower credit score is a red flag to credit card companies that you may be a risky borrower.
- Reliable income: Your credit score doesn’t stand alone. “You could have the best credit score in the world, but lenders still want to know that you have the ability to pay your bill,” Casarez said.
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.
“These banks make a lot of money the longer that your current balance is at a higher interest rate,” he said.
3 questions to ask before transferring your debt
If you’re looking to save money and get out of debt faster, balance transfers are a powerful weapon to have in your arsenal — if you know how to use them wisely. Here’s what to consider before giving it a go.
1. Do you understand why you’re in debt?
This strategy won’t work if you don’t get to the root of why you’re in debt to begin with. What kinds of purchases make up the bulk of your existing credit card statements? Whether they’re living expenses, splurges or surprise pop-up bills, it’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.
“If you don’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,” Casarez said. “It’s like a hot potato you’re passing around, but there’s going to come a day when you have to pay up.”
Having emergency savings on hand provides an additional safety net because you won’t need a credit card to see you through your next unexpected bill. Our insiders recommend building a $1,000 mini-emergency fund while you’re paying off debt.
2. Can you pay off your debt before the introductory period ends?
Once your budget and emergency fund are in shape, it’s time to shop around online for balance transfer offers. Ones with the lowest transfer fees and longest 0% introductory periods are best, but here’s the catch: This strategy only makes sense if you can pay off the balance before that period ends, at which point you’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.
3. Are you OK with taking a short-term credit hit?
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 you’re ultimately eliminating high-interest debt faster.
“Your score will improve much faster than it would have had you not engaged in the strategy,” he said. “You take a small step backward for a huge step forward, if you’ve got the discipline to do it.”
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 your best interest rates on these purchases.
3 alternatives to a balance transfer
If a balance transfer isn’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.
1. Debt snowball method
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 it’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.
“The 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 you’re focusing on those smaller balances,” Casarez said.
“You start to build up some momentum and confidence,” he added. “As you do that, you start to get a little bit more swagger and feel like you’re actually making progress and have more control over your financial situation than you thought.”
2. Debt avalanche method
This strategy puts your highest-interest balance above all others. When you compare it to the debt snowball method, it’s the fastest and cheapest way to get the job done, which is why Metzger said it makes the most sense.
“With that being said, people are quirky,” he added. “If 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.”
3. Debt Consolidation loan
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 you’ll have one new balance and monthly payment. This strategy is ideal for those who can lock down a lower interest rate. What’s more, personal loans often have fixed rates, monthly payments and repayment timelines, so it makes budgeting a whole lot easier.
And since it’s a lump-sum installment loan — not a revolving credit line in which you can charge and pay off as you go — using it to eliminate credit card debt should boost your credit score because you’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 it’s the right debt consolidation method for you.
When shopping for a debt consolidation loan, it’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 your best results!
Compare Debt Consolidation Loan Options
Which is the best way to pay off debt for you?
It all depends on your situation. If you’ve got a solid credit score and qualify for attractive balance transfer offers, it’s worth exploring — as long as you don’t charge new debt and you’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. They’re all, as the old saying goes, “Different paths up the same mountain.”