When you’re paying a high interest rate, it’s difficult to get ahead in your debt repayment efforts. Your high interest rate often means that a good portion of your payment goes to pay your finance charges — instead of paying down your debt principal. With the help of balance transfer credit cards it’s possible to break the cycle, since all of your payment goes toward reducing your debt.
How a Credit Card Balance Transfer Works
When you transfer your balance, your new credit card pays off the balance of the old card(s). The amount of debt you can transfer depends on your new interest rate. Now, instead of having your debt attached to a high interest rate, it is attached to a 0% rate. This means that you pay no interest for as long as the 0% rate is good.
It’s important to be careful, though. Most balance transfers are limited in scope. So, after the promo rate runs out, you have to start paying interest on the balance. Another issue is that you will likely have to pay a balance transfer fee of between 3% and 5% of the amount you transfer. Factor this in, since what you save in interest might not offset the balance transfer fee.
Once your balance is transferred, your payments will count for more, though, since you will be able to put all of the money toward paying off debt, and none of it is going to a monthly interest charge. You can accelerate your efforts — as long as you remain disciplined.
Making the Most of Your Balance Transfer
In order to get the best results from your balance transfer, you have to plan ahead. Paying off debt requires that you plan carefully, and that you stick to that plan. Here are the two things that you absolutely must do if you want the best results from your balance transfer:
- Pay off the balance before the interest rate goes up: Make sure that you pay off the balance before your interest rate goes up. If you can get a card that has an 0% APR for between 12 and 24 months, that is ideal. It gives you more time. Figure out how much you need to pay each month to discharge the balance before the 0% APR is gone. That way, you save in interest.
- Avoid racking up more debt: The biggest pitfall associated with a balance transfer is the tendency to rack up more debt. Once your balance is transferred to a new card, it leaves more room on the old card. You might be tempted to use the old card to spend. When this happens, you have more new debt — and you are in even worse shape. Instead, make sure that you put the old card on ice. And if you don’t think you’ll be able to resist, cut up the card and cancel the account, and take the resulting credit ding.
A credit card balance transfer can be a way to help you pay off your debt a little faster, getting ahead as you tackle the principal. Just make sure that you are careful, and that you approach your debt pay down efforts with a plan.