Millions of people are drowning in credit card debt, feeling like there’s no way out. Between Covid and inflation and gas prices, it’s harder than ever to make ends meet without using a credit card to assist. And that’s if you don’t have an emergency… but who doesn’t have emergencies?!
With my recent health crisis, I’m carrying credit card debt… and I’m not happy about it. But when your cash flow situation doesn’t let you pay in full every month, it’s easy to fall behind.
And of course that snowballs because interest racks up every month, making it even hard to pay your credit card debt down. There are things you can do to speed it up, like always paying more than the minimum payment or making multiple payments per month. But the best way to knock off some high-interest credit card debt – other than winning the lottery- is to transfer it.
A recent survey by GoBankingRates revealed some insane statistics about credit card debt in the U.S., including:
- Most Americans carry some sort of credit card debt, ranging from $1,000 to more than $10,000.
- 33% of those people believe it will take them more than 2 years to pay that debt off.
- 57% of Americans have missed at least one credit card payment.
According to a recent study by WalletHub, the average household’s credit card balance is $8,942 and the total credit card debt for U.S. consumers in the second quarter of 2022 was $1,065.6 billion. That’s 14.3% higher than just a year ago!
Needless to say, most of us are struggling with credit card debt.
If you’re one of these people, you might want to consider a balance transfer. This lets you effectively “refinance” high-rate credit card debt for a temporary zero percent (or other extremely low) rate.
Making this balance transfer gives you the opportunity to pay down your debt much faster, because more of your money will go to paying down the principal, instead of paying off the interest.
Sounds straightforward, but like all things credit card-related, balance transfers come with multiple catches.
Deals that seem great may not be and confusing repayment rules can trap you with even more debt.
So, before you transfer your balances, make sure you read all of the fine print and compare different transfer options. That way, you’ll get the biggest benefit out of your balance transfer…. And avoid getting stuck in an even bigger mountain of credit card debt.
How Balance Transfers Work
You’ve probably gotten balance transfer offers in the mail or in your email, offering a zero percent APR if you move over debt from a competing credit card. It sounds like a great deal, trading 16.99% debt for 0% debt, and paying no interest at all for six to eighteen months.
These deals can help you reduce crippling credit card debt, and finally help you get ahead financially if you use them wisely. That’s harder to do than it sounds, but when you go into it with accurate knowledge and a clear plan, you can use balance transfers to your advantage and make a serious interest-free dent in your credit card debt.
Save Money and Pay Off Debt
Sky-high credit card interest charges can make it extremely hard to pay off your debt. The minimum payments barely cover the current interest, leaving pennies to pay toward the principal. You can make slightly more progress by making more than the minimum payments, but still, a large portion of every payment will go toward interest.
That’s where the zero percent (or even a very low rate) balance transfer card comes in so handy, as long as your goal is to fully pay off the debt that you transfer during that promotional period.
Once you transfer high-rate credit card debt onto a no-interest card, every dollar of every payment will go toward your debt. That lets you pay your debt down much faster and at a lower cost.
For example, let’s say you owe $4,500 on an 18 percent credit card. If you can afford to pay $300 a month, it will take you 18 eighteen months and cost $636 in interest.
But if you transfer that $4,500 balance to a zero percent card with a three percent transfer fee, you’d pay off your balance in 15 months and it would cost you $135 (because of the transfer fee). That would keep an extra $500 in your pocket… and out of the greedy hands of the credit card company.
Choose the Best Credit Card to Transfer Your Balance
Before you pick a balance transfer card, figure out how much you want to transfer and how long it will realistically take you to pay that off.
For example, if you can afford to pay $250 a month toward this debt and you want to transfer $3,500, you’ll need a transfer card that offers that zero percent rate for at least fourteen months.
Don’t discount cards that charge balance transfer fees in exchange for a long-term zero-percent rate. These fees usually run between three and five percent of the amount you transfer. So, for example, you’d pay $60 if you transferred $2,000 with a three percent fee. You’ll still save money because the transfer cost (almost) always comes out to much less than the interest you would have been charged.
Do look at any other fees associated with the new card. For example, if the transfer card comes with annual fees, remember to factor that into your repayment plan. You’ll also want to be aware of any late payment fees and penalties, just in case.
Don’t Get Caught in a Balance Transfer Trap
Balance transfer cards are full of pitfalls that can derail your financial plans. Be aware of these traps, and avoid them at all costs or you may end up deeper in debt than when you started. Though your paydown plan starts with choosing the right balance transfer card, all of them come with these same potential dangers.
Balance Transfers Take Time! Pay Your Current Credit Card Bill
Balance transfers don’t happen instantly. They can take up to two weeks. If the credit cards you’re transferring balances from have payment due dates during that time, make those minimum payments. Otherwise, you’ll get hit with late payment fees, which can go as high as $41.
Pay Attention to Your New Payments
Once you’ve done a balance transfer, do not miss a single payment due date. Being late by even one day will eliminate your 0% interest rate, which is the whole point of the transfer. Plus, most cards will also charge you a late payment penalty, which will add to your balance due.
To avoid this trap, schedule automatic monthly payments from your checking account that cover at least the minimum payment due. And if the minimum payment is zero -which they sometimes are – schedule monthly payments anyway. Set a calendar reminder for yourself so you can make sure you have enough in your checking account to cover that payment. You’ll be glad you did when the balance comes due.
Know Your Repayment Time Frame
Before you make the transfer, figure out how much you can devote to each monthly payment in order to be done by the time the zero percent rate disappears. Make sure that you pay off the full transferred balance during the promotional period. The split second that period ends, the rate will go sky high.
Worse, some cards will charge you interest retroactively on the unpaid balance. That means you’ll suddenly owe six (or twelve or eighteen) month’s worth of interest on the remaining balance due.
And like all other credit cards, unless you pay the card off in full, you’ll end up paying interest on that interest.
Don’t Use Your Balance Transfer Credit Card for Anything
I can’t stress how important this is: Do not use your balance transfer card for anything at all until after you’ve paid off the full transferred balance. It’s one of the biggest credit card mistakes people make. Here’s why….
First, new charges on this card get payment priority. Those charges get paid before any money goes toward your transferred balance. For example, if you use your balance transfer card to buy $100 of groceries and make a $200 payment toward your debt, the first $100 of your payment goes directly toward those groceries.
Second, if your payment isn’t enough to cover 100 percent of the new charges, those charges will start to rack up interest at the regular card rate, not the zero percent promotional rate. That means less and less of your payments will go toward your transferred debt, jeopardizing your entire paydown plan.
Ready to Pay Off All of Your Debt?
Credit cards are just one form of debt that can frustrate everything you do and prevent you from reaching your financial goals. There are many others, and it’s possible that you’re dealing with more than one debt issue.
Fortunately, there are ways to manage and pay off every form of debt. And they don’t involve living on a shoestring budget and eating packaged ramen noodles or macaroni and cheese every night.
To find out how you can pay down all of your debt, check out my book, Debt 101: From Interest Rates and Credit Scores to Student Loans and Debt Payoff Strategies, an Essential Primer on Managing Debt
In this book, I show you how to get out of debt and use credit wisely, so you can make your debt work for you.
Click on the button below to get your copy now, and get on the path to being debt-free today.