Let me preface this post by saying that I’ve never used a balance transfer credit card offer myself but I’ve seen a number of people use it successfully to help them pay off their debt faster. Using a balance transfer credit card can easily help you save $1,000’s in interest each year but it does come with some risks.
A balance transfer credit card is a credit card that usually has a low introductory interest rate for the first 6-12 months. The interest rate could be low single digits or even 0%. If you carry a credit card balance then using a balance transfer credit card could save you $1,000’s of dollars if you do it right.
Someone with $15,000 in credit card debt at 19.99% could save $3,000 in interest over the course of 12 months. That money can be put towards paying down your debt faster.
How does it work?
The idea behind a balance transfer credit card is super simple. Basically you pay off credit card #1 by using your new balance transfer credit card, card #2. The first card has a high interest rate, usually 20%+ and the second card has a really low interest rate, sometimes as low as 0%. By transferring your balance from card #1 to card #2 you save yourself 20% interest per year.
Payments don’t stop. The monthly payments just switch from card #1 to card #2. But payments will be lower with card #2 because the interest rate is lower on the balance transfer credit card. One tip is to keep your monthly payments the same. This will help you get rid of your credit card debt faster.
Using a balance transfer credit card does come with some risks. Here are some more tips when using a balance transfer credit card.
Tip #1: Know what the fee is…
Banks are greedy so they never do anything for free. Balance transfer credit cards usually come with a fee for any money that you want to transfer over. The fee is usually 1-3% of the balance you want to transfer. Sometimes there is a fee per $1,000 you transfer. Obviously the lower the fee the better the card. Either way its smart to first figure out how much you’re going to pay in fees when you transfer over your balance.
Tip #2: Know what the interest rate is after the introductory period…
What’s worse than paying 19.99% interest? Paying 28%. Banks want you to use balance transfer credit cards because they want to make money from your interest payments. They’re hoping you don’t pay off the balance by the time the introductory period is over. Then they get to rake in that sweet interest. Watch out for cards that have a higher interest rate than you currently have. If you can’t pay off the balance during the introductory period then you might be digging yourself deeper with the higher interest rate.
Tip #3: Consolidate multiple credit cards…
If you have multiple credit cards with a running balance then you can always use a balance transfer credit card you consolidate all your payments into one. Not only will this save you money in interest but it will save you time too. Now you only need to make one payment per month.
Tip #4: Don’t skip a payment…
One huge drawback with balance transfer credit cards is that if you miss a payment the introductory rate may expire immediately rather than after 6-12 months. If this happens your interest rate will jump up back to 20%+ plus you’ll still have to pay the balance transfer fee. Missing a payment could put you in a worse position than when you started.
Tip #5: Watch out for interest on new purchases…
Only the amount you transferred gets a preferred interest rate. Any new purchases immediately get a higher interest rate if you don’t pay them off each month. This means that when you make a payment you need to work with the bank to ensure that your payment is going towards new purchases first and then your balance second. If this can’t be done then you probably want to avoid making purchases on your balance transfer credit card.
Tip #6: Don’t run up your balance…
Getting a balance transfer credit card basically increases your credit limit. You want to avoid running up the balance further and getting yourself deeper into debt. Put the first card on ice, literally. Put the credit card in a tub of water in the freezer. This will prevent any impulse purchases but leaves the card available for big emergencies.
Using A Balance Transfer Credit Card:
Using a balance transfer credit card correctly will get you out of debt much faster than you normally would. You can easily save $1,000’s per year by successfully using a balance transfer credit card. But if you don’t follow the tips above you’ll find yourself deeper in the hole so tread carefully and read the fine print.
Photo by Ed Ivanushkin via Flickr