Paying down debt can become a long tedious task that is difficult to maintain over several years. Success may mean cutting back on expenses, living like a college student once again, and deciding what bills get paid down first. You need a strategy to maximize impact with the least amount of pain, and hopefully not destroying your credit in the process. Without a well thought out plan you can run out of steam and motivation, get further behind, and end up quitting before success is achieved.
One of the key challenges with any debt elimination strategy is that so much of your monthly payments go towards interest instead of the principle balance, leaving you with minimum progress even with your best effort. A balance transfer option might be an effective piece of your debt elimination strategy. This option can reduce interest rate payments, sometimes to zero, giving you momentum and progress towards debt elimination.
How Do Balance Transfers Work?
Balance transfers are a way of moving debt from higher interest rate credit cards to lower interest rate cards. While you are not paying off the debt, you are temporarily paying less for the debt you are able to transfer, allowing you to make more progress with the same payments.
The advantage to a balance transfer is that the cost is low (perhaps zero if there are no transfer fees) and you can often gain zero interest for a set period of time. So while debt is not initially reduced you are reducing the cost of carrying the debt immediately. Now instead of paying several hundred dollars a month in interest payments, those payments will directly reduce your balances.
Qualifications for Balance Transfers
Current credit score and income to debt ratios are the key factors in making a balance transfer work. Typically, zero interest promotions are reserved for new customers. You must have good to excellent credit to qualify for a new credit card and you must have enough income to cover payments on a new credit limit. If you are over expended this might be a challenge.
While most offers are for new clients, if you have a card with available credit you can call and negotiate a balance transfer offer. It is also possible to negotiate a lower transfer fee for a card you are considering. With new applications you do not know your available limit at the time of the application. Generally, offers are good for the first 30 to 90 days enabling you to select the debt to be transferred after the card is approved.
Things to Consider When Using a Balance Transfer Strategy
The four biggest considerations for balance transfers is the fee for the actual transfer, the promotional period you are offered the lower rate, annual fee on the transfer card, and the rate charged when the promotion ends.
- Balance transfer fees range from 0% to 5%. At 0%, it is easy to see how much you will save over the promotional period. 3% on a $10,000 transfer could have you paying $300 or up to a cap, for the privilege of transferring the debt to another card. This may still be a good deal. Consider that if the current rate is 25% you are paying around $225 in interest each month. When the rate is at 17% the monthly interest is closer to $150 each month in interest. The tradeoff of 0% for a year or more will still save you a lot more than one or two months in interest charges.
Credit Cards.com offers a free balance transfer calculator which lets you see the amount of money you can save under the specific terms you are considering. http://www.creditcards.com/calculators/balance-transfer.php. It is important to read the fine print so you understand all of the costs associated with a balance transfer.
- Length of time you enjoy the lower rate will ensure the initial costs will be offset during the promotional period. The length of time 0% is offered is a major factor in overall savings. 6 months to 24 months is the most common time frames. Currently 21 months in the Citibank Simplicity card is the longest period offered at zero percent interest.
- Annual fees are becoming more common, particularly for those with fair to good credit. Often the first year the annual fee is waived which helps reduce overall costs. It still may be worth the promotion and you have the option to cancel the card before the annual fee is charged.
- Rates after the promotion period is important if you will have a balance at the end of the promotion. If the new card has a higher rate than your current rate, you may not end up in a better position in the long run, if you transfer more than you can pay off during the promotional period. When this is the case transferring only what you can pay off during the 0% may be the best strategy.
It may be possible to get the long term rate lowered if on time payments are made during the promotional period, though it is not guaranteed. It is wise to count on being able to transfer the balance again, as there is no way to determine if such offers will be available.
How to Effectively Use a Balance Transfer to Eliminate Debt
The big challenge with this strategy is qualifying for another card, when you currently have a lot of debt. If you are able to qualify, the process is simple and you can generally get approved online in a few minutes. This creates a quick solution and can significantly reduce monthly payments, temporarily.
The best strategy is to make your current payments on the new card to quickly reduce debt during the promotional period. Many who use the debt transfer strategy are not able to transfer all debt onto a low interest rate card. If this is the case, evaluate whether you are better paying off the 0% debt or doubling up on higher interest debt during this period.
If the long term rate on the new card is higher, you may choose to only transfer what you can pay off during the promotional period. The last tip is to put away both the old card and the new card to ensure new debt is not created during the time you are reducing debt.
Where Do I Find Credit Cards to Use a Balance Transfer Strategy?
Credit Karma.com (https://www.creditkarma.com/shop/creditcards) enables you to compare cards, rates, and balance transfer offers based on your current credit score.
Credit Cards.com (http://www.creditcards.com/) allows you to search by offers, credit quality, interest rates, and other parameters to find the best card for your debt elimination strategy.
Nerd Wallet has a great article evaluating the top cards in 2015 for balance transfers found at: http://www.nerdwallet.com/blog/top-credit-cards/nerdwallets-best-balance-transfer-credit-cards/.
On each of these sites you are able to apply for the credit card based on your needs.