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If you have a credit card with high interest or a credit card with unfavorable terms overall, a credit card balance transfer may be the answer.
If you don’t know what a balance transfer is — no worries.
Seriously. I didn’t know the ins and outs of a balance transfer until I was in my mid-20’s. A balance transfer is when you pay off existing debt (credit cards, payday loans, other weird and expensive loans) with a credit card that’s offering 0% APR or low-interest introductory period.
Usually, introductory periods last from six months to as much as two years. Essentially, you’re transferring your balance to a new, more affordable card — hence the name.
It can take significantly longer for you to pay off debt when your interest rate is bucking 20% or more. But the good news is, if you’ve built a strong credit history in recent months or years, you may be able to qualify for a short-term 0% or low introductory special.
The Good/Bad of a Credit Card Balance Transfer
Here’s what you need to know about the advantages and disadvantages of a credit card balance transfer:
- Benefit #1: Pay off debt without interest for a while. For a certain amount of time, balance transfer cards offer low interest so you can chip away at the principal interest-free. That’s a definite pro in my book. The principal is the amount that you actually used to make purchases. Whereas interest is the amount they’re charging you to borrow money. If you have high interest, you’re paying a lot before you even TOUCH the principal. Not fun.
- Benefit #2: Make new purchases without interest as well. Another perk is some cards that have balance transfer deals will allow you to make new purchases during the introductory period without interest either. You could make big purchases to pay off slowly with no interest. Be smart with this approach though! You don’t want to rack up a bunch of debt during an interest-free period that you can’t pay off.
- Benefit #3: You can hack the system. Lastly, say you have a ton of credit card debt that’s impossible to pay-in-full within just one introductory period. You could choose a credit card offering the lowest interest at first and then transfer your balance to another low-interest card at the end of the introductory period. Move your debt around until it’s paid off to save on interest. You can play the system. Just be careful. Every time you apply for new cards it’ll appear on your credit history. You may seem less creditworthy if you’re about to buy, let’s say, a house and you have a bunch of inquiries for credit cards. But if debt repayment is your primary concern, this is a viable option.
Sure, there’s some bad with balance transfers. But if you play your cards right you can just sail smoothly into debt repayment heaven.
- Con #1: The rules. The reason that credit card issuers offer a free introductory period isn’t because they like you. Nope. They want your business. Offering you a special deal takes you away from the competition and puts you right in their lap. Banks and credit card companies are hoping you’ll mess up during the special period and won’t be able to pay it back in time. After the introductory period, standard interest rates apply and they’ll make their money. Don’t let that happen to you.
- Con #2: Retroactive interest. Another thing to note, if you don’t repay your balance before the grace period ends, some companies will charge you back interest from the beginning of your transfer.
- Con #3: Lastly, some credit cards charge a fee of 3% to 4% for transferring your balance. However depending on the interest of your current credit card, the fee may be well worth the benefit of no interest.
How to Transfer Your Balance “Like a Boss…Uhh”
Feelin’ my Rick Ross impression? I knew you would. As you can see, there are some downsides of balance transfers if you don’t handle your business. Here are some tips to make a balance transfer work in your favor:
- Be strategic. Have a plan from the very beginning of your balance transfer. If you have so much debt that you can’t possibly pay it all within introductory, decide what you want to do after.
- Don’t make frivolous new purchases. You shouldn’t party like it’s your birthday on the card you transfer your balance to even if it doesn’t charge interest on your new purchases for a while. Why? Because that may hinder you from being able to pay your old debt off within the introductory period.
- Establish a debt pay off plan. Do not go into an credit card introductory period thinking you have all the time in the world to pay off your balance. Time flies. Before you know it, you’ll be in the last few months leading up to the end of your promotional period. If you can’t make the final payments, you’ll have to scramble.
- Read the fine print. Like with any contract, there’s plenty of fine print with credit cards. Do your due diligence and make sure you know what you’re signing up for before you take the plunge.
Learn more about how the process of using a balance transfer card works here.
Looking for more stories about saving money and repaying debt? Here are good places to start:
- How to Save Money When You’re Broke as Hell
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- 100+ Things to Cut Out to Save Money on Monthly Expenses
- How I Increased Student Loan Payment By 500% on a Humble Salary
- 35-Day Holiday Savings Challenge
- How to Repay Debt With a Zero Sum Budget
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