It’s better to give than receive – until the credit card bills arrive. If you’re facing credit card debt after celebrating the holidays a little too much, you are not alone.
According to a Lending Tree survey, shoppers who used their credit card for purchases collected an average of $1,230 in debt in November and December. Of course, this doesn’t include the credit card debt many people already have.
Most credit cards have an interest rate or APR (annual percentage rate) ranging from 14% – 24%. Currently, the average APR is around 17%, which is a record high. Add the high interest rates and you may feel like you’ll never eliminate your debt. A balance transfer credit card may be the answer.
How does a Balance Transfer Card Eliminate Debt?
A balance transfer credit card enables you to transfer your high-interest credit card balance from one or more credit cards to another card with an introductory 0% APR offer.
Your debt becomes more manageable since you have a certain period with no interest (0% APR promotional offers generally range from 12-18 months although there are some with up to 21 months).
You can save thousands of dollars in interest by paying down your balances before the introductory period ends. you can pay down your debt while saving money on interest
Is a Balance Transfer Card the Best Option?
Before rushing to apply for a balance transfer credit card, here are some steps to ensure a balance transfer card is right for you.
Make a Plan
You will save the most money if you are able to pay off your credit card balances by the end of the introductory period. The APR goes up to normal rates when the period ends so you may cancel out any savings. To ensure you save the most money possible, you should set your financial goals and create a plan to pay off your debt.
Know How Much You Can Afford
Determine how much you can afford to pay each month toward your balance and how long it will take. The longest available no-interest balance transfer introductory offer is for 21 months.
If you can’t pay off the debt in the specified timeframe, you will have to pay a high interest rate (could be as high as 25%) on the remaining balance. If you think it may take longer than 21 months, consider a personal loan instead.
Check Your Credit Score
Most balance transfer cards require good to excellent credit. If you credit score doesn’t meet the standards, you might not get approved for the 0% APR promotional offer or for the amount you need. Review balance transfer offer to find the best deal for your credit score. If you have low credit, you will likely not get approved.
Know Your Issuer
Most credit card issuers do not allow balance transfers between accounts. For example, if your balance is on a Chase credit card, you will only be able to transfer a balance if it’s from another issuer such as Citi or Discover.
Choosing Your Card
To ensure you select the best balance transfer card for your needs, consider these items:
- 0% APR period - Find a balance transfer card with a no-interest period matching the time period you determined in your financial plan. Be realistic. If you don’t pay your balance off by the end of the promotional offer, you will have to pay the current APR rate, which is averaging about 17% but can go as high as 25%.
- Balance transfer fee – Most balance transfer cards charge a balance transfer fee of 3-5% of the transferred balance amount. However, a 5% fee is still less than what you are currently paying in interest.
- New purchases - Do not make new purchases with your balance transfer card. Even though many cards will offer a 0% purchase APR, you are still better off not accumulating any more credit card debt. Once you make your balance transfer, put your card away or cut it up to avoid the temptation to use it.
- Late fees and penalty APR – If you make your payment late, most cards charge a late fee and, after 60 days of nonpayment, may charge additional interest. In addition, a late or missed payment could void the balance transfer offer, forcing you to pay a higher interest rate.
- Balance transfer period – Most balance transfer offers require you to transfer a balance within a certain period of time after account opening or account approval (usually 60 days). The longer you wait to make the transfer, the less time you have to pay off your debt under the 0% introductory rate. If you don’t make the transfer within the allotted time, you forfeit the 0% APR period.
- Terms and Conditions- Before transferring your balance, review the card’s fine print. It’s important to know the consequences of not complying with terms and conditions. Otherwise, you may negate the benefits you were hoping to get from the balance transfer.
- Additional fees - Make sure you understand if there are any additional fees such as an annual fee or foreign transaction fee. These fees can take away from your savings.
Bottom Line A balance transfer credit card can help you dig out of your holiday debt but make sure to make a plan and know all of your options. You want to pay the debt off – not create more.