What You Should Know Before Doing a Balance Transfer
May 16, 2017
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Most Americans have credit card debt, and the average household has a balance of $5,700. With the mean interest rate on credit card debt rising to 13.6% percent, your balance can quickly balloon out of control. You can end up paying hundreds or even thousands in interest fees, making it difficult to ever get out of debt.
If you’re serious about paying off your cards once and for all, a balance transfer can be a useful tool to help you take control. However, if you are not careful, a balance transfer can end up worsening the problem and leading you into even more debt. Here’s what you need to know before you transfer your debt onto another card.
What Is a Balance Transfer?
With a balance transfer, you move your credit card balance from your current card to a new one with low or even 0% interest. With your interest rate reduced, more of your payments go towards the principal, and you save money over the length of your repayment. A balance transfer can help you achieve your goal of becoming debt-free faster.
Many companies offer 0% interest as a promotional offer so that interest rate is only available for a limited time. After the introductory period is over, the interest rates revert to the standard charge.
Compare Credit Card Offers
Before making the move to transfer your debt, do your homework and compare offers from multiple companies. Factors you should consider include:
- Length of promotional period: Some companies offer a very short promotional period, while others allow you to enjoy 0% interest for a year or more. That gives you more time to make payments and eliminate your debt.
- Annual fee: While a balance transfer can give you substantial cost savings, some companies charge an annual fee. Depending on the charge, the annual fee can negate the value of the balance transfer.
- Regular interest rate: Make sure you know what the interest rate will be once the promotional period is over. Some credit cards have interest rates as high as 20%, which can add to your balance.
- New purchases: Understand if new purchases are covered by the 0% interest offer, or if that only applies to the balance you transfer over. Companies have different rules.
If you’re looking for an extended promotional period, the Barclaycard Ring™ Mastercard® offers a 0% intro APR for 15 months on balance transfers made within 45 days of account opening. After that, a variable 14.24% APR will apply within 45 days of account opening.
For borrowers who are more concerned about the interest rate after the promotional period is over, the JetBlue Card has a regularly low APR.
Pay Off the Balance During the Promotional Period
Many people do a balance transfer, but because they have lower interest and their old card is wiped clean, fall back into bad habits. They continue living their lifestyle exactly as it is and end up racking up new debt.
To avoid adding to your balance, pay more than the minimum payment. Making just the minimum will not get you out of debt within the promotional period. Instead, divide your debt by the number of months in the introductory offer.
For example, say you had $15,000 in debt, you had 15 months with 0% interest, and your minimum payment was $400 a month. To pay off your balance in full before the offer expires, you’d have to pay an extra $600 a month towards your loans. If you can’t commit to that, a balance transfer could be a costly mistake.
Avoid New Spending
When you do a balance transfer, it’s important to not make new charges on your card or carry a balance. Doing so will only worsen the problem. Instead, make a budget and keep to it, and pay off your charges right away.
It may require you to make changes to your lifestyle, such as cutting back on expenses or taking on a side gig, but being disciplined will pay off over time.
Freeze the Old Card
If you are easily tempted by online shopping or going out with friends, freezing your card (literally or not) can help. After you do a balance transfer, call your old credit card company and ask them to freeze your account during the promotional period.
Alternatively, you can cut it up or put it in a bowl of water and put it in the freezer. If you decide to make an impulsive purchase, you’ll have to find an alternate payment or wait until it thaws, which can give you time to change your mind. It may sound extreme, but it will stop you from spending.
Managing Your Debt
If you are focused on eliminating debt, a balance transfer can be a smart way to pay it down and save money. It’s important to remain disciplined to get through it without racking up more debt. Be prepared with a plan to accelerate your payments and manage your payments to become debt free.