I’ve heard of balance transfers for a while now, but have been wary of doing one. This basically allows you to get a new credit card to pay off the old one. The key is getting a new card with a low- or zero-percent introductory interest rate over those months, for example 6 or 12 months, so you’re putting money toward your balance, not the pesky interest. It can help you get out of debt quicker and save money overall.
Strategize Before Getting a Balance Transfer
While listening to Ready For Zero’s MoneyBuzz podcast, a co-hostess talked about how she once got a balance transfer card but didn’t create a strategy to pay off her balance before the introductory period expired. She got hit by interest twice. Boom!
Years later, she ended up using another balance transfer to pay off that debt within the allotted time period. The plan made the difference. She knew exactly how much to pay each month to avoid interest. Hearing her success story made me seriously consider doing a balance transfer for the first time.
- Purchase Annual Percentage Rate (APR) | Of course, you hope to qualify for a card at 0 percent.
- Balance transfer APR | 0 percent, please!
- The expiration date for the teaser rate | It could be 6 months, 12 months or longer. You don’t want to get caught up and not pay your balance within 6 months. You have to be careful. After the 6 or 12 months are up, the interest rate jumps up significantly. A card I considered chose between 12.99% and 22.99% depending on the card applicant’s creditworthiness. Obviously, you don’t want to have a balance and get hit with those high interest rates…AGAIN.
- Balance transfer fee | Some cards charge a percentage, for example 3 percent, of the balance you wish to transfer to the new card. So you would be charged a balance transfer fee of $3 for a card with a $100 balance.
While looking around, I noticed that you can’t get do a balance transfer within the same company. So example, you can’t dump debt from one Company A card to a second Company A card.
I ended up getting a card that offered 0 percent interest on new purchases AND balance transfers for the first 15 billing cycles of my account. Also, there was no fee for balance transfers within the first 60 days of opening the account. I qualified for the lowest APR after the 15-month teaser period. Thanks, good credit score! The company approved a full transfers from one card and a partial transfer from another. Using this balance transfer calculator, I estimated that I could save $762 in interest over the duration of the promotion. After the promotional period, I could save about $19 each month.
I called the company to better understand how this will all work.
- Balance transfers help consolidate payments. Depending on your situation, you can make one payment for two cards.
- My old companies will receive payments from the new cards, so they won’t necessarily know that I made a balance transfer. It’s as if I paid the cards in full.
- The balance transfer could have a negative impact on my credit score temporarily.
If you plan to apply for credit like a loan or mortgage in the near future, then some folks advise against doing a balance transfer. Why? A balance transfer could negatively impact my credit score in three ways.
- Debt utilization (30 percent of my FICO score) | I’ll basically max out the balance transfer card. The rule of thumb is to use 30 percent or less of a card’s credit limit. That’s not good.
- Opening new credit (10 percent of my FICO score) | Opening new accounts could lower my score. Lenders don’t want to see that you apply for new credit often. That’s risky.
- Length of credit history (10 percent of my FICO score) | The longer I’ve had a card, the better.
It’s a good thing I don’t plan on applying for anything soon.
I’m going to continue to use the Debt Dash/snowball method to pay down these two cards using the balance transfer. It’s great that my cash will go toward the balance instead of interest. Cheers to the interest-free future!