If you want to pay down your higher-interest credit card debt, transferring your balance to a card with a lower interest rate could help. Learn how balance transfers work and how to make this tactic work for you.
A balance transfer moves a balance from a credit card with a high annual percentage rate (APR) to one with a lower APR in order to save money on the interest you’ll pay.
Say you have a credit card balance of $5,000 and plan to pay it off in a year using either your high- interest credit card or a card with an introductory or promotional 0% APR on balance transfers for 12 months. The balance transfer offer can save you hundreds of dollars in interest.
When does the promotional rate end? Promotional or introductory new card rates often end 9–21 months after they start. To maximize your savings, determine how long the low rate lasts and how much you can pay off before it ends. Be sure to keep up with your payments, because missing one will likely cancel your promotional rate and you’ll have to start paying interest.
What fees are associated up front? When transferring a balance to a credit card, generally you pay a transaction fee of 3% to 5% of the transferred amount. However, the long-term savings from the lower promotional rate can outweigh the cost of this fee.
What happens when the promotional rate expires? Once the introductory or promotional rate ends, the contractual rate kicks in. Going from 0% to 15% in one month can be an unwelcome surprise if you’re not prepared. Read the fine print of the offer before you transfer.
In general, most balance transfers have one APR, while other transactions, purchases, cash advances and fees incurred, have their own interest rates.
Understand your current balances and the interest rates for each.
Look for a credit card intended for balance transfers, with the right combination of low APR, low (or no) transfer fee and a long introductory period.
Consider how much you’ll need to pay each month in order to pay down your balance before the introductory rate expires.
Apply – online, to get your answer sooner.
If you’re approved, call the new card’s customer service number to transfer the balance from your old card — or you may be able to do this yourself, using your card’s online dashboard. You’ll need the account information for the balance you’re transferring, and the amount that you want to transfer.
Keep paying your old card, because your balance transfer will take some time to process. Don’t stop paying until you confirm that the transfer has gone through.
What else should you know?
These ideas can help you tackle credit card debt fast.
Do you carry a balance on more than one card? If so, make sure you always pay at least the minimum on each card. Then focus on paying down the total balance on one card at a time. You can choose which card you target in one of two ways:
Check the interest rate section of your statements to see which credit card charges the highest interest rate and concentrate on paying that debt off first.
Pay off the card with the smallest balance first, then take the money you were paying for that debt and use it to pay down the next smallest balance.
Look at your credit card statement. If you pay the minimum balance on your credit card, it takes you much longer to pay off your bill. If you pay more than the minimum, you’ll pay less in interest overall. Your card company is required to chart this out for you on your statement, so you can see how it applies to your bill.
Simple solution: Pay a bit extra each month. Every dollar over the minimum payment goes toward your balance—and the smaller your balance, the less you must pay in interest.
Consolidating your debt can let you combine several higher-interest balances into one with a lower rate, so you can pay down your debt faster without increasing payment amounts.
If you do consolidate, keep in mind that it’s very important to control your spending to avoid racking up new debt on top of the debt you’ve just consolidated.
Start by categorizing your monthly spending, for example: groceries, transportation, housing and entertainment. Your credit card statement can be a helpful tool; many issuers categorize your spending.
Next, look for areas where you can cut back. Then take the money you’ve freed up and apply it to paying down your debt.
Even if you don’t qualify for a low promotional or lower APR, a balance transfer still can help. Combining debts can simplify your life by giving you fewer bills to pay and fewer creditors to deal with. Depending on your debt size and whether you will need more time than a promotional period to pay it off, consolidating with a personal loan might be a better solution for your needs.
Remember: Paying down high-interest debt is smart.
Balance transfers are a good step down that path, but it’s important not to incur more debt in the meantime.