Back in 2008 I was working as a low-paid intern at a magazine, living in New York City for the first time and enjoying every minute of it. Since I made essentially no money, and my rent was about 80% of my income each month (yikes), I did what anyone dying to live a life she can’t afford would do — I put stuff on credit cards.
For months I racked up bills on my two or three credit cards, until one day, a shiny piece of mail arrived offering me a brand new credit card with 0% interest for a year when I made at least one balance transfer.
I was hooked.
I opened that first 0% interest credit card and rolled over all my pre-existing balances onto it, promising myself that I wouldn’t actually use my new credit, and I would just divide my total balance by 12 and be sure to pay it off in my given year so that I would never have to actually pay interest on it. I did that once, then again a couple months later when a new offer came in the mail. Suddenly, before I knew it, I had about 12 credit cards to my name, only one of which I was using on a consistent basis to actually buy things. All the others had been opened for the sole purpose of paying off debt.
Sound sketchy? As it turns out, it was probably the best thing I could have done at that point in my life to avoid paying tons of interest on my purchases. (These days, thankfully, I make more money and have learned to live within my means.) Here’s what you need to know about balance transfers, so you can determine whether or not they’re the right move for you, as well.
What is a balance transfer?
A balance transfer takes place when you roll over your debts from one credit card to another one. Usually there is a one-time transfer fee associated with this move, which is generally a percentage of the amount of money you’re actually transferring over. The best way to get the most out of a balance transfer is when you can move debts from a high-interest interest card to a low or no interest one. Check out this video for more on the ins and outs of a balance transfer.
When should I make the move?
If you’re swimming in debt on a high-interest card and only making minimum or small payments, you should consider looking into a balance transfer. ( This calculator can help you figure out how much you’ll be paying in interest over the course of a year, but beware — it probably won’t be pretty.) Of course nothing’s better than zero interest, but really, anything that’s significantly less than the interest you’re paying on your current card will be helpful.
What’s the catch?
Generally if you’re cautious and read the fine print, you should be able to take full advantage of a balance transfer without falling into any real traps. Having said that, make sure you do the math on how much a balance transfer fee will cost you to make sure you aren’t spending more here than you would in interest on your original card. Be sure to make all transfers within the allotted amount of time given for the offer to last (usually within 60 days), and resist the temptation to splurge on something fancy with your new card. Often new purchases outside of the balance transfer may not be eligible for the low or 0% interest deal, and you may just end up getting caught in the cycle of interest all over again. Check out this piece for more about potential pitfalls to avoid.
Is it bad for my credit score?
A hard inquiry (which happens when you apply for new credit cards) could result in a five to 10 point drop for your credit score. That might sound bad, but remember that other factors like payment history, utilization and length of credit history are all weighted more heavily than a hard inquiry for your credit score. A couple hard inquiries to open new cards won’t be too bad for a savvy user and you’ll bounce back in a few months.
I made the switch — now what?
Congrats on your new low interest card! Now cut it up.
No, seriously — it’s important to remember that this card is being used strictly for the purpose of paying off your debts, and it’s not to be used for new purchases (which, by the way, as we mentioned above, probably aren’t part of that shiny low or no interest offer). Figure out a plan to pay the card off in full by the time your low interest offer runs out, and keep all of your cards open, even once you’ve paid them off. This will help increase your utilization, which helps boost your credit score. Check out this piece for more things to do once you’ve completed your balance transfer.