Should You Do A Balance Transfer?

November 16, 2017

A friend of mine recently asked me about doing a balance transfer, which is a common question I receive. After all, you may get offers in the mail for credit cards with rates that look quite enticing compared to what you’re currently paying. There are definitely some pros and cons, and here are a few other things to consider:

How’s your credit? Depending on your credit score, you may not qualify for the best deals or even any new credit at all. To make matters worse, if your application gets turned down, that will hurt your credit score even more. You can get a free credit score at sites like Credit Karma, Credit Sesame, NerdWallet, and Quizzle to see what balance transfer offers you might actually qualify for before applying. (keep in mind that those sites use their own formula and may not be exactly the same as the credit scoring system the credit card company uses)

What are the fees and how long does the balance transfer rate last? You want the interest savings to outweigh any fees you may have to pay to transfer your balance. Be aware that you may end up with a higher fee once the promotional rate ends. You may be able to find a better long term deal from peer-to-peer lending sites like Lending Club and Prosper.

Can you borrow from your 401(k)? If you can’t qualify for a new credit card or if the balance transfer rate is still higher than 4-6%, you may want to pay off your credit card debt with a 401(k) loan instead. There’s no credit check and you pay the interest back to yourself. But you should also be aware that there are potential downsides to this option as well.

Do you have equity in your home? Another option is using a home equity loan or line of credit to pay off your credit card debt. If you have a good credit, you can qualify for a pretty low rate that’s also tax-deductible. If you’re in the 25% tax bracket, a 4% loan would really be a 3%, which is much less than you can expect to earn by keeping your 401(k) money invested. The big downside is that you can lose your home if you default so this is not a good option if you might have trouble making payments.

Is this part of a strategy to pay down your debt? No matter which of the above options you choose, one of the biggest mistakes people make is to do a balance transfer or otherwise refinance their debt and then run the debt right back up on the old credit card. Make sure any balance transfers you do is part of a wider plan to pay down your balance faster rather than get deeper in debt. That starts with getting control over your spending so you’re living within your means. See some relatively painless ways to save money here and here.

Like with most financial questions, the answer to whether you should do a balance transfer is,“it depends.” Know the pros and cons of your different options. Regardless of your decision, make sure it’s an educated one.

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The Pros & Cons Of Balance Transfers

September 20, 2017

If you’re carrying credit card debt and paying on time, chances are you also regularly receive offers from various financial institutions offering you balance transfer deals. If you’re serious about paying off your debt and have fixed whatever issue caused you to accumulate the debt in the first place, then it can seem like a no-brainer — using balance transfer deals can be a key step in getting to zero debt sooner. But before you pull the trigger to transfer your balance to a new card, make sure you’ve considered all the potential pitfalls first.

Advantages of balance transfers

Lower interest rate — The lower your rate, the more impact your payments will make toward your balance. Just make sure you know you’ll qualify for the low interest rate before committing to the transfer or you could end up with a higher rate than your original card.
Accelerated debt pay-off — To determine exactly what the impact of lowering your interest will have on your timeline, plug your info into the Debt Blaster calculator to confirm.
Pay less interest over time — You can also use the Debt Blaster to calculate how much you’ll save in overall interest, but you also need to add in any balance transfer fees. Make sure you do the math before committing to make sure the savings are worth the potential risks.
Consolidation of balances — Balance transfers can also help you to consolidate several small balances onto one lower-interest card, which means you’ll have less hassle and less chance you’ll forget to make a payment.

Potential disadvantages of balance transfers

Transfer fees — Most balance transfer offers include some type of fee, which is typically 1 – 3% of the balance you’re transferring. For example, if you’re transferring a $3,000 balance to a card with a 3% transfer fee, you’ll be starting with a balance of $3,090. Make sure you factor that in to any interest savings calculations you perform. If you can find an offer with no transfer fee and a lower interest rate, take it! (check the fine print first to make sure there isn’t some other catch to make up for it though)
Promo rates — Keep in mind that balance transfer rates are typically lower than new purchase rates, so if you are using the new card to shop while trying to pay down your balance (which is a very slippery slope anyway), you’ll most likely negate the interest savings of the balance transfer. A best practice is not to “comingle” your debt — keep the cards you’re using for low balance transfer rates strictly for paying down balances.
Rate expiration dates — Many times the low rate that card companies offer to entice you to transfer your balance has an expiration date, usually between 8 and 24 months after you open the card. That’s fine, as long as your plan includes that end date so that you can either have the balance paid off or transfer it to another card.
Type A personality traits required — Managing the debt payoff via balance transfer does require a bit of attention to detail, so just be aware that if you’re not Type A like me, you’ll probably need to put some stopgaps in place like setting multiple reminders on your calendar and phone and even asking a friend or family member to make sure you come back and reassess your situation at least a month before any promo rates expire.
Could dig you deeper — The reason that banks offer these deals in the first place is because they know that many people, despite their best intentions, will simply use this new card to accumulate even more debt, rather than pay it off as would be the best plan. When you open a new card to transfer the balance, consider cutting up your old card to avoid the temptation to accumulate another balance on that fresh zero statement. You don’t have to close the card (that could be a hit to your credit), but cut it up or give it to someone you trust for safe-keeping.
Credit score ding — It’s true that applying for credit does cause your score to take a temporary dip, as will closing old cards to make sure you aren’t tempted to run the balance up again, but if your goal is to get out of debt faster and this achieves it, worry less about your credit score (which will rebound) and more about saving money in unnecessary interest and getting out of debt ASAP.

One final thing: make sure that you’re doing balance transfers strictly as part of a debt pay-off plan instead of as a way to accumulate even more debt. I’ve worked with people before who found themselves deeper and deeper over their heads in debt when they started playing musical credit cards with their balance. It’s important that it’s part of a debt pay-off plan and not just a way to stay afloat.

The Ins & Outs Of Balance Transfers

August 30, 2017

One 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.

The Fastest Way To Pay Off Credit Card Debt

December 07, 2016

Is one of your financial goals getting out of credit card debt so that you can start directing that money toward something more fun like a new home, college education or retirement? Throwing away money on credit card interest is an incredible waste. The best way to avoid this, besides staying out of debt in the first place, is to work to lower your interest rates as much as possible while paying off your debt as quickly as possible. Here’s how I dug myself out of $8,000 worth of credit card debt after college:

I listed all of my accounts in order of interest rates, starting with the highest.
I started paying the minimum on all cards except for the one with the highest rate. I paid as much as I could afford on that account, initially starting out with a fixed $200 per month payment.
When I received an offer to open a new card with a 0% promotional interest rate on balance transfers, I applied and received a card with a $2,000 credit limit.
I transferred $2,000 from the highest rate card to the new card but kept paying the highest amount on the original card.
Once that card was paid off, I added $200 to the amount I was paying on the card with the next highest interest rate.
I marked my calendar for when the 0% promo rate was to expire and a month before, I opened a new 0% card and transferred the balance over.
I continued to pay down my other cards that charged interest with gusto.
Anytime I came across extra money such as a tax refund or a signing bonus for a new job, I sent the money straight toward my highest interest rate credit card.
Eventually, I was just left with the balance on the 0% card. I continued to pay it down aggressively, and when the promo rate expired, I continued to open new accounts at promo rates to transfer the balance.
Within about five years, I was debt free.

Now, there are a few things to consider here. First, every time I applied for and opened a new account, my credit score took a hit. This only worked for me because I had excellent credit, which I maintained through on-time payments for all my debt, including my student loans, car payment and even utilities.

Second, each balance transfer incurred a fee that was typically a percentage of the balance I was transferring. I had to make sure the interest I was saving by transferring the balance was more than I paid in a balance transfer fee. Finally, I had to actually stop using credit cards in order for this to work. Once I was out of the debt, I did go back to using credit cards, but I kept a close eye on the balance so that I was able to pay it off each month.

If your credit isn’t great, you may not qualify for low promotional rate cards. If that’s the case, then consider calling up your credit card companies and request that they lower your rate. You may even suggest that if they lower your rate, you’ll transfer other balances onto that card. Remind them of your on-time payment history and threaten to transfer your balance away if they don’t work with you.

The key to success here is never wavering on that large payment amount. Being strategic about how you pay off your cards can also trim months or even years off your debt. Use this Debt Blaster to calculate the difference it will make.

3 Alternatives to Borrowing From Your 401(k)

July 10, 2014

Last week, I wrote about some reasons it might actually make sense to borrow from your 401(k). After all, there’s no credit check and the interest goes back into your own account. But even in those situations, there may be better options. After all, borrowing from your 401(k) means your money isn’t growing for retirement, the money generally has to be paid back over a relatively short 5 year period, and the outstanding balance could be subject to taxes and penalties if you leave your job. Here are three alternatives along with their pros and cons relative to a 401(k) loan and a couple of sites you can use to find them: Continue reading “3 Alternatives to Borrowing From Your 401(k)”

The Cure for the Financial Hangover

December 28, 2011

Now that the holidays are behind us, do you find yourself carrying a few extra financial “pounds?” That is, did you put so much of your holiday shopping on plastic that you end up starting the New Year carrying a balance on your credit card? If so, then you’re probably not alone. According to First Data, credit card use among holiday shoppers soared, and continued use could make the problem worse. The good news is that there is a cure to the financial hangover. It begins with a commitment to get rid of the debt, followed by a plan for reducing it. To help you get started, here are some simple steps you can take to start shedding the financial weight: Continue reading “The Cure for the Financial Hangover”

When Short Term Interest Rates Rise – What Should I Do?

June 16, 2011

One of the questions I ask the attendees of my workshops is, “Where do you think interest rates will be going in the future?” The overwhelming majority state that they feel rates are going nowhere but up. Now, I certainly appreciate that there could be an outside chance that rates may dip from where they are, but that is not as likely as rates going up (in my humble opinion). So, if in fact we are moving to higher rates, what are some things you can do now to take advantage of the current rate environment? Check out the tips below to see if any of these apply. Note: while they may seem like a “no-brainer,” it’s those types of actions that we often don’t take. Continue reading “When Short Term Interest Rates Rise – What Should I Do?”