Debt can be a helpful means to an end – it lets you make major purchases or cover unexpected bills without having all the cash up front. On the other hand, taking an extended period of time to pay off a debt balance can be costly. With credit card interest rates hovering around 20%, paying off an outstanding balance can seem like a never ending chore.
Getting out from under credit card debt takes time and effort. In some cases, a balance transfer credit card can get you there faster.
Credit Card Balance Transfer – Defined
First thing’s first: what is a balance transfer?
A balance transfer is a tool that can be used to reduce interest charges on outstanding credit card debt. Through a balance transfer, you can move one or more credit card balances to a new credit card that offers an interest rate as low as 0% for a set amount of time. In consolidating your balance, you have the opportunity to eliminate or greatly reduce interest charges during the offer period. Each payment goes further towards reducing the principal amount owed which in turn reduces the time it takes to pay off the amount owed.
Most balance transfer offers provide a low to no interest time frame ranging from six to eighteen months, after which it reverts to a double-digit interest rate. If you’re not able to pay off the transferred balance during the offer period, the higher interest rate will apply. It’s important to have a plan in place for repaying a balance in full over the balance transfer period as to avoid unnecessary interest charges.
When Should I Use a Balance Transfer?
Using a balance transfer is a smart choice if you’re carrying consumer debt with a hefty interest rate and you have a strategy for paying off the transferred balance during the low-interest rate period. Taking advantage of a balance transfer could result in hundreds to thousands in savings, depending on the total amount you owe.
Keep in mind a balance transfer is only beneficial when the interest rate offered is lower than your current credit card’s interest rate. Be diligent about making more than the minimum payment each month.
Balance transfers typically require you to apply for a new credit card, which can be a challenge if you don’t have a strong record of making payments on time. If you aren’t sure if you can qualify for a new credit account, look to your current credit cards to see if a balance transfer offer is available.
It’s also important to recognize that there is a fee associated with credit card balance transfers. The typical charge ranges from 1- 5% of the balance transferred, which is added to the amount you owe. Some credit card issuers will offer balance transfers with no fees, so shop around before settling on a balance transfer credit card.
Start Fresh and Pay Off Debt
A balance transfer can be a powerful tool in helping you get out of credit card debt. Be mindful, however, of how you got here in the first place. Credit cards are so easy to use they make even the savviest consumer vulnerable to overspending. Think about what you can do to curb credit card use before committing to a balance transfer. Don’t run the risk of having to do another in the future.
Take a minute to figure out the amount you can pay each month towards the balance transfer and work on your remaining balance during the interest-free period. Clearing credit card debt with a balance transfer requires some work, but with a little understanding and a solid plan, you can start fresh by wiping out credit card debt in a cost-effective way.