Transferring Credit Card Debt to a Lower Interest Card
Balance transfers are a useful method for paying down credit card debt because they can make paying what you owe easier through lower (or no) interest charges being imposed on that debt.
Many credit cards use this as one of many enticements to get new customers to sign up, offering 0% introductory APR’s on balances transferred over to the new card. These offers typically last for a year or more and consumers with substantial balances and high interest rates can find some relief.
Even a card with a lower rate than the one carrying a high balance (and rate to match), can give you a leg up on reducing or completely eliminating your debt.
But there are some things you should know first, before you start signing up for that new card.
How a Transfer Works
Let’s say you’ve run up a $3,500 balance on your MasterCard and you’re paying an APR of about 18%. Along comes an offer for a Visa card, where you can transfer that balance at an APR of 0% for 12 months. That means you can use the Visa to “pay off” the MasterCard in full.
Now you have a Visa card with that $3,500 balance (plus any applicable interest from the previous card and/or fees from the new one for making the transfer), but the difference is that your Visa issuer won’t be adding 18% on top of your outstanding balance every month. All you need to pay is the current balance.
This can make reducing your credit card debt much easier, instead of having your MasterCard issuer add another $630 to your balance each month, you can now focus on paying down the principal balance. Just make sure you do it before the 12 month introductory APR ends. If you don’t, that balance will be subject to whatever the APR becomes after that period expires.
Choosing the Best Card
If you’re getting inundated with credit card offers or you’re seeking one out on your own to transfer your balance to a more manageable card, be sure you look past the 0% APR to find out what you’ll be charged for holding that balance after the initial introductory rate.
This is important because you don’t want to be taking on a higher interest rate than what you’re paying now just for the privilege of paying off your debt without an APR for a predetermined amount of time. So when you’re searching around for the best card, be sure to investigate every aspect of the card you’re taking on.
Getting a 0% APR is terrific, but not if it means that rate jumps up to 23.25% after. Chances are you can find a better card out there or it may behoove you to stay with the card you currently own at 18%. Just be diligent about finding the right card, if you don’t investigate further, you could be getting in deeper trouble in the long run.
Transferring Multiple Debt
Another helpful benefit of transferring your balance from one card to another is that you may be able to transfer multiple balances to your new card. This is a smart way to consolidate your debt so that it’s all placed with one creditor at an interest rate you can afford.
If you are currently juggling multiple cards with various interest rates, due dates, and subsequent late fees for missed payments, it can be very tough to keep track of it all. That can make it tougher for you to stay on track and keep your finances in order.
Combining them all on one card lets you pay the total of all your balances down without high interest rates hanging over your head and there’s only one due date to remember for your future payments.
You can consolidate more than just credit cards as well. Take a look at any other debts you’re paying down with high interest rates attached to them. You may want to pay them off with your 0% APR card and then assume the debt at no interest. This can include just about anything on a monthly installment payment.
But be careful about how you do it. Don’t pay the debt off with the credit card, your card may only have that introductory offer for balance transfers, not purchases. If you pay the loan or financing debt with the card, that would count as a purchase transaction. Instead, ask the bank issuing the card for a check and use that to pay down the balance on your high interest loan.
That way, you can add the balance to your card as a transfer instead of a purchase and be eligible for the introductory rate.
Balance Transfer Fees
As I mentioned earlier, transferring a balance may come with an applicable fee. Keep this in mind when you’re deciding whether or not to apply for that new card for the purposes of lowering your interest on that debt. Most cards will impose a balance transfer fee on their customers and while there used to be a limit on banks could charge, those days are long gone.
How much could you be charged now? It depends on how much you transfer over to the card. Many cards will charge you 3% to 4% of the amount, so if you transfer over a balance of $1,000, you’ll be pay $30 or $40 just to complete the transaction. Transfer a higher balance, you’re going to pay even more.
When you’re shopping around for your new card, weigh your options between transfer fees and see how much you’ll really save in transferring your debt to a new card. The fees could cut into that savings considerably if you have a lot of debt to pay off. This component of shopping around for a new card is just as critical as knowing your APR after the introductory rate expires.
