The Ins & Outs Of Balance Transfers
August 30, 2017One way to speed up the process of paying off debt while saving money in the long run is by transferring balances to credit cards with lower interest rates. This is a strategy that I used to dig myself out of over $8,000 of credit card debt after college.
Moving even a $2,000 balance from a 16.99% interest rate to one with a 3.99% rate while continuing to pay the $40 minimum payment can save you over $1,300 in interest and reduce the time you’re paying by almost 3 years. It’s really just a form of refinancing debt using credit cards. But there are some nuances to understand when employing this strategy.
Here’s how it works.
When you perform a balance transfer, you’re essentially using your new credit card to pay off the original obligation by paying what you owe to the original card, loan or bank. Your original lender can’t stop this, as they simply see the transfer as a payment being made on your behalf.
Timing
You can request a balance transfer to a credit card you hold at any time, although many card companies offer special deals if you transfer a balance to the card within 30 days of opening the account. If you are opening a new card to transfer your balance, it’s a good idea to include that request at the same time as your application, as this may help ensure that the credit limit of your new account will be high enough to enable a full transfer of your old balance. If not, it’s still worth it to lower the interest on at least part of your balance, just make sure you stay on top of your payments.
Beware the final payment
Even if your balance transfer pays your former account off in full, you may need to make one more payment the following month for any interest that had accrued up to the day you transferred, so make sure you plan for that. I remember thinking I had finally broken free of a super high rate card back in the day, only to be hit with a late fee for not paying the final $30 of interest that had been charged to my account after I’d paid off the balance. That’s perfectly legit, so double check your balance is at zero for good for a couple statement cycles before you officially forget about your original account.
Length of promo rate
If you are taking advantage of a special interest rate offer (they typically last between 6 and 24 months), make sure you know how long the low rate will last so that you can try to have the balance paid off (either by paying it down over the months or by transferring your balance to another card in the future) before the rate increases. Set a reminder on your calendar at least a month out from the expiration date to make sure you don’t miss it.
Transfer fees
Most cards charge a balance transfer fee, which is typically a percentage of the amount you transfer, especially if you’re transferring to a 0% card. If you can find one that doesn’t charge a fee, that’s a great deal! Make sure you take that in to consideration when you’re evaluating the total cost of the move (interest plus fees) to make sure it’s still a good deal.
Also know that sometimes card companies will send you checks in the mail with special offers for using them, such as a lower interest rate or bonus reward points — double check the fees to use those checks before you take advantage, as sometimes it’s higher because it’s considered a “cash advance,” even though you’re not actually getting any cash.
What you can transfer to a credit card
All major card companies will allow you to transfer your balance from any other major credit cards and most also allow you to transfer balances from store cards. If you’re looking to transfer other types of debt, like a car loan, student loan, business loan or payday loan, you’ll want to check with the card company to see if they will allow that — some do, some don’t.
What you’ll need to initiate a transfer
- The account number of the balance you’re looking to transfer
- The amount you wish to transfer
- The personal information required when opening a new credit card (social security number, income, employment info, etc.)
Other things to consider
- Your credit score might go down, but it should bounce back as you pay down the new account — Chances are your balance transfer will take up most of the credit limit of your new card, so your credit utilization score might take a hit. As long as you pay down the balance (that’s the reason you’re doing this in the first place, right?), that issue will go away, so it shouldn’t stop you unless you’re also planning to apply for another loan like a mortgage or auto loan before you can get your credit utilization back down.
- Keep your original account open, even if you don’t use it — This will not only help your credit utilization score, but it will help to maintain your credit history as well. If you’re worried that you might be tempted to run the balance up again, you can cut up the card, just don’t close the account. That’s what I did.
- Avoid new purchases with your balance transfer card — You may start to receive nudges from your new card company encouraging you to use the card for purchases by offering you things like cash back or reward points, but don’t take the bait! I’ve seen too many people fall into this trap and wind up in way worse shape than they started because they used their new card to shop while also trying to pay down the original balance they transferred. When I was paying off balance transfer cards, I didn’t even carry the card with me to avoid this pitfall.
The ability to transfer my balance from card to card as I paid down the balance was a huge reason I was able to dig out of my $8,000 debt in about 5 years. If you’re serious about doing what it takes to get out from carrying credit card debt for good, mastering the art of balance transfers will help significantly.