How to save money with balance transfer credit cards
When you've been carrying a credit card balance for long enough, it can start to feel like you'll never pay it off. And the longer you wait to pay it down, the more interest charges you rack up over time. It's the kind of debt that can become crushing.
That's when a credit card balance transfer can help. An online marketplace can help you compare lenders and see what each company has to offer. Find a card that fits your needs.
Here's what you need to know about what a balance transfer is, how it works and, most importantly. how it can potentially save you money on interest charges.
What is a balance transfer?
A balance transfer is when you move an existing balance from a credit card with a high interest rate to a new card - usually one with a 0% APR. These special intro APR offers last for a limited period of time, typically between six and 21 months. During that time, interest will not accrue on your balance and all of your payments will go directly toward the principal.
Cardholders will have to pay a balance transfer fee, usually 3% or 5% of the balance. For example, if you're transferring $5,000, the fee could cost either $150 or $250.
If considering a balance transfer credit card, you should also make sure your credit is in top shape. You can start working on your score today.
How to save money with a balance transfer
If you can afford to repay the balance before the 0 interest offer expires, you could save hundreds or even thousands in total interest. Check out some of the offerings to determine how much money you could potentially save.
Let's say you owe $5,000 on a card with 15% APR and you qualify for a card with 0% APR for 12 months and a 3% balance transfer fee. If you are able to pay off the balance before the 0% intro APR period expires you can save $1,073.89 in total interest. Use a balance transfer calculator to see how much you could save.
Even if you can't pay off the entire sum before the intro APR expires, you may still wind up saving money by paying off most of the balance before the higher rate kicks in.
How to choose a balance transfer card
Not all balance transfer credit cards are created equal.
There are several things you should consider when picking your card.
- A credit card with the longest intro APR period. That will give you more time to repay the balance. Many cards offer 0% APR on both purchases and balance transfers, but sometimes the intro APR timeframe is shorter for balance transfers than it is for new purchases. Make sure you understand how long the balance transfer offer lasts and whether new purchases are subject to an interest charge.
- A credit card without an annual fee and other benefits. Look for cards that have other benefits, such as cash-back rewards when you make certain purchases or a sign-up bonus if you spend a certain amount within 90 days. Just make sure you don't end up with a large balance that you can't afford to repay.
- A card with a low balance transfer fee. The lowest available is usually 3%, but there may be cards that don't charge any balance transfer fees at all. However, if you find a card with a longer intro APR period, paying a higher balance transfer fee may be worth it.
Just note: You cannot transfer your balance to the same card issuer that you currently have. For example, if you have a balance on a Wells Fargo credit card, you cannot transfer that balance to a new Wells Fargo card and still qualify for the intro APR offer. You have to choose a new credit card company.
Give yourself the best chance to get a card with good terms by improving your credit.
What to know before applying for a balance transfer card
Most credit card companies will only provide the intro APR offer if you make your payments on time. If you pay late, the company may rescind the offer.
To avoid this, set up automatic payments on your card and have the payment go through a few days before the official due date. Then, create a reminder on your phone to log on and double-check that the autopay has gone through.
Also, you have to transfer the balance yourself by calling your current credit card issuer or logging onto your account online. Make sure to initiate this process as soon as the new card has been opened. The countdown on the intro APR offer starts when the account has been opened, not when the balance has been transferred. If you wait too long, the balance may no longer qualify for the interest-free discount.
Most balance transfer offers are only open to consumers who have a credit score between 700 and 750, but some cards will approve those with a score between 650 and 700. If your credit score is below that range, you may need to wait and improve your credit score before applying for a balance transfer.
Having a credit card balance can be a symptom of overspending. Before you apply for a balance transfer, start tracking and budgeting your expenses. You need to fix the habits that got you into credit card debt before applying for a balance transfer, or this strategy will just be a temporary fix and not a long-term solution.
Consider a debt consolidation loan as an alternative
Debt consolidation loans allow borrowers to combine their debts into one simple loan with a lower interest rate. The benefits of this unique financial option are multiple. Here are three primary advantages:
- You can save money with a lower interest rate: Debt consolidation loans are especially helpful for those with high-interest credit cards. The average interest rate on a 24-month personal loan was 8.73%, according to recent data from the Federal Reserve. Compare that to the average credit card interest rate of 16.65% - almost double!
- You can boost your credit score: After a series of on-time payments to the loan (and assuming you don't wrack up debt elsewhere), you'll start improving your credit.
- You can know when to stop paying: With a debt consolidation loan, there is a definitive repayment date so the borrower knows exactly when they can stop paying. So, even if the debt you've consolidated is significant, at least you'll know when it will be eliminated.
If debt consolidation loans sound beneficial then reach out to a loan expert who can help get you started.
