Hacking Your Way Out of Debt -- What Your Bank Won’t Tell You
Credit card purchases are easy to make, but they can quickly add up over a few months and high interest rates can cause your balance to balloon. Then, it can begin to feel overwhelming. What do you do when you can’t pay off the amount all at once?
There are a few methods of getting rid of credit card debt – some people do a personal loan. Some people talk to a credit building company (you have to make sure you vet them carefully). One way many people with decent credit can get out of debt is doing a balance transfer.
Yep. You’ve likely gotten some offers in the mail and thrown them away. They usually say “0% APR for 18 months!”
When Does a Balance Transfer Make Sense?
- You have decent credit
- You are able to curb your spending and can commit to paying it off before the introductory period
- You can get approved for it 😃
How a Balance Transfer Works
In a balance transfer, you transfer debt from one credit card to another.
Step 1. Open a new credit card with a 0% APR introductory rate. Try to get a credit card with the a decent time period for the rate, it’s usually 12-18 months.
Step 2. Follow the instructions to transfer the debt from one card to another. You can usually do this online or over the phone. Doing it on the phone is nice because you can ask questions.
Step 3. Your new credit card will pay off your old credit card debt and then transfer the balance to your new credit card.
PRO TIP Some cards have a time limit for balance transfers, for example, it’s only 0% APR if you transfer within 30 days.
Step 4. You will start paying off the new credit card. Make sure you pay it off before the introductory rate is over! That’s the only way you win over the credit card companies.
For example, if you have a balance of $7,500 on your current credit card with a 20% APR, you might be able to transfer that balance to a new credit card with a 0% APR (on new purchases and your balance transfer) and no transfer fee for the first 12 months. After the 12 month period, the APR for your new card will go up to 20% APR but you will have paid off that debt and not incurred additional interest.
Warnings! Things to know about a balance transfer
A balance transfer might sound like a great deal, but the risk that you run into is that you don’t pay off your credit card debt at the end of the introductory time period. Even if you don’t pay off your debt in that time period, you could still save money by not having to pay interest on your balance for those 12-18 months or whatever the introductory time period is.
Remember that before you do a balance transfer, it’s important to understand some points:
Cards will often offer you an introductory APR on your balance transfer and your purchases. Make sure you know what rate you are getting for each (ideally 0% APR for your balance transfer).
There can be a set time period when you need to do the balance transfer or else you end up jumping to the higher Variable APR (e.g., 30 or 60 days to do a transfer)
The introductory period for the lower interest rate can vary by card. Understand what period it covers.
Usually, there is a fee associated with a balance transfer (e.g., 3-5% of the balance). Make sure you calculate this fee. Some cards offer no fees.
You may not be able to transfer your entire balance depending on how much debt you have.
The best cards and rates are offered to those with good or excellent credit.
There may also be an annual fee (for more perks) or rewards (bonus points or cash back) with some cards. We would suggest you optimize for the lowest introductory APR, time period, and balance transfer fee since your goal should be to pay down your debt and not spending more money.
Our Last Note on Balance Transfers
At the end of the day, a balance transfer might be able to save you extra money, lower your interest rate, help you pay down debt faster, and improve your credit score. You just need to make sure you have a plan for paying off the debt in the introductory period because a balance transfer won’t make your debt go away! Create a debt payment plan, and be on your way to financial success.