Interest charges are one of the reasons why getting out of debt is so difficult. That’s especially true with credit card debt, since the average interest rate is a staggering 21.47%. If you have $5,000 in debt at that rate, interest will cost you about $90 per month.
Balance transfer credit cards are often considered the solution. These cards have a 0% intro APR. That means you can transfer over other debt, and then you won’t have to pay interest anymore during the intro period. Intro periods can last a long time, too — some cards offer a 0% intro APR for up to 21 months. You usually need good credit (a credit score of 670 or higher) to qualify for cards like these.
Many people think that opening a balance transfer card is always a great move. It can be, but there are some things you should know first.
Balance transfer cards work well for large amounts of debt
If you have a large amount of high-interest debt, a balance transfer card is usually a good idea. After all, the point is to get out of debt while saving as much money as possible. With the 0% intro rates that balance transfer cards offer, the math is in their favor.
Credit cards almost always have a balance transfer fee. The standard transfer fee amount is 3% to 5%. Because of that fee, a balance transfer wouldn’t make sense with debt you could pay off in a few months. But for debt that will take you six months or more to pay off, it’s almost always worth it.
Let’s say you have $5,000 of credit card debt at a 21% APR. You can pay $250 per month toward it. You’re deciding between paying it normally or moving it to a balance transfer card with a 21-month 0% intro APR and a 3% balance transfer fee. Here’s how those two options would work out:
- Paying it normally: You’re out of debt in 25 months and pay $1,208 in interest.
- Balance transfer: You’re out of debt in 21 months and pay $150 in balance transfer fees.
In this situation, a balance transfer saves you $1,058 and gets you out of debt four months sooner.
On the other hand, if you’re paying $250 a month toward $1,000 in credit card debt, a balance transfer isn’t as useful. If you paid off your debt normally, it would cost you $46. You’d avoid that with a balance transfer card, but you’d pay a $30 transfer fee. Overall, you’d save $16. That’s not worth the trouble of opening a new credit card and going through the balance transfer process.
Pay off your debt — don’t just shuffle it around
There’s a common mistake some people make with balance transfer cards. Once they’ve got that 0% intro APR, they relax about paying off their debt. They may only pay the minimum, or start charging more and racking up additional debt. They figure that if they don’t pay off their balance within the 0% intro APR period, they’ll just find a new card and do another balance transfer.
Even with a 0% APR, it doesn’t benefit you to carry around credit card debt. You still need to make monthly payments on it, which ties up money you could be using elsewhere. There’s also no guarantee you’ll always be able to get a new balance transfer card. And let’s be honest, do you really want to play the balance transfer game for three or four years?
A balance transfer card is a tool that can help you pay off debt. It doesn’t do the work for you. To get the most out of a balance transfer card, pay as much as you can on it. Try to get all your debt paid off within the intro period. Getting up to 21 months with a 0% APR is a fantastic opportunity. If you take advantage, you could save money on interest, and most importantly, become debt-free more quickly.
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