Credit card balances are crippling households across the United States, giving them insurmountable debts that just keep on growing and never seem to go away. But there is some good news, as this problem has spawned a multitude of debt relief options, one of which is a credit card balance transfer.
Balance transfers are a similar and widely available option for all debtors to clear their credit card balances, reduce their interest rate, and potentially save thousands of dollars.
How Credit Card Balance Transfers Work
A balance transfer credit card allows you to transfer a balance from one or more cards to another, reducing credit card debt and all its obligations. These cards are offered by most credit card companies and come with a 0% APR on balance transfers for the first 6, 12 or 18 months.
Consumers can use this balance transfer offer to reduce interest payments, and if they continue to pay the same sum every month, all of it will go towards the principal. Without interest to eat into their monthly payment, the balance will clear quickly and cheaply.
There are a few downsides to transferring a balance, including late fees, a transfer fee and, in some cases, an annual fee.
What Happens When You Transfer a Balance on Credit Cards?
When you transfer a balance, your new lender repays your credit card debt and moves the funds onto a new card. You may incur a transfer fee and pay an annual fee, which can increase the total debt, but transferring a balance in this way allows you to take advantage of a 0% introductory APR. While this introductory period lasts, you wonât pay any interest on your debt and can focus on clearing your credit card debt step by step.
Why are Balance Transfers Beneficial?
A little later, weâll discuss some alternatives to a balance transfer offer, all of which can help you clear your debt. However, the majority of these methods will increase your debt in the short term, prolong the time it takes to repay it or reduce your credit score.Â
A balance transfer credit card does none of these things. As soon as you accept the transfer offer, youâll have a 0% introductory APR that you can use to eliminate your debt. The balance transfer may increase your debt liabilities slightly by adding a transfer fee and an annual fee, but generally speaking, this is one of the best ways to clear your debt.
To understand why this is the case, you need to know how credit card interest works. If you have a debt of $20,000 with a variable APR rate of 20% and a minimum monthly payment of $500, youâll repay the debt in 67 months at a cost of over $13,000 in interest.
If you move that debt to a card with a balance transfer offer of 0% APR for 12 months, and you continue to meet the $500 minimum payment, youâll repay $5,000 and reduce the debt to $15,000. From that point on, youâll have a smaller balance to clear, less interest to worry about, and can clear the debt completely in just a few more years.
Of course, the transfer fee will increase your balance somewhat, but this fee is minimal when compared to the money you can save. The same applies to the annual fee that these cards charge and, in many cases, you can find cards that donât charge an annual fee at all.Â
You can even find no-fee balance transfer cards, although these are rare. The BankAmericard credit card once provided a no fee transfer offer to all applicants, in addition to a $0 annual fee. However, they changed their rules in 2018 and made the card much less appealing to the average user.
Pros and Cons of Credit Card Balance Transfers
From credit score and credit limit issues to a high variable APR, late fees, and cash advance fees, there are numerous issues with these cards. However, there are just as many pros as there are cons, including the fact that they can be one of the cheapest and fastest ways to clear debt.
Pro: 0% Introductory APR
The 0% APR on balance transfers is the best thing about these credit cards and the reason they are so beneficial. However, many cards also offer 0% APR on purchases. This means that if you continue to use your card after the transfer has taken place, you wonât be charged any interest on the new credit.
With most cards, the 0% APR on purchases runs for the same length of time as the balance transfer offer. This ensures that all credit you accumulate upon opening the account will be subject to the same benefits. Of course, accumulating additional credit is not wise as it will prolong the time it takes you to repay the debt.
Pro: Can Still Get Cash Rewards
While cash rewards are rare on balance transfer cards, some of the better cards still offer them. Discover It is a great example of this. You can earn cash back every time you spend, even after initiating a balance transfer. The cash rewards scheme is one of the best in the industry and there is also a 0% APR on balance transfers during an introductory period that lasts up to 18 months.
Pro: High Credit Limit
A balance transfer card may offer you a high credit limit, one that is large enough to cover your credit card debt. You will need a good credit score to get this rate, of course, but once you do your credit card debt will clear, you can repay it, and then youâll have a card with a high credit limit and no balance.
Throw a rewards scheme into the mix (as with the Discover It rewards card) and youâll have turned a dire situation into a great one.
Con: Will Reduce Credit Score
A new account opening wonât impact your credit score as heavily as you may have been led to believe. In fact, the impact of a new credit card or loan is minimal at best and any effects usually disappear after just a few months. However, a balance transfer card is a different story and there are a few ways it can impact your score.
Firstly, it could reduce your credit utilization ratio. This is the amount of credit you have compared to the amount of debt you have. If you have four credit cards each with a credit limit of $20,000 and a debt of $10,000 then your score will be 50%. If you close all of these and swap them for a single card where your credit limit matches your debt, your score will be 100%.
Your credit utilization ratio points for 30% of your total FICO score and can, therefore, do some serious damage to your credit score.
Secondly, although FICO has yet to disclose specifics, a maxed-out credit card can also reduce your score. By its very nature, a balance transfer card will be maxed out or close to being maxed out, as itâs a card opened with the sole purpose of covering this debt.
Finally, if you close multiple accounts and open a new one, your account age will decrease, thus reduce your credit score further.
Con: Transfer Free
The transfer fee is a small issue, but one worth mentioning, nonetheless. This is often charged at between 3% and 5% of the total balance, but there are also minimum amounts of between $5 and $10, and you will pay the greater of the two.
This can sound like a lot. After all, for a balance transfer of $10,000, 5% will be $500. However, when you consider how much you can save over the course of the introductory period, that fee begins to look nominal.
There may also be an annual fee to consider, but if your score is high enough and you choose one of the cards listed in this guide, you can avoid this fee.
Con: Late Fees and Other Penalties
In truth, all credit cards will charge you a fee if youâre late and you will also be charged a fee every time you make a cash advance. However, the fees may be higher with balance transfer cards, especially if those cards offer generous benefits and rewards elsewhere. Itâs a balancing act for the providerâan advantage here means a disadvantage there.
Con: High APR on Purchases
While many balance transfer cards offer a 0% APR on purchases for a fixed period, this rate may increase when the introductory period ends. The resulting variable APR will often be a lot larger than what you were paying before the transfer, with many credit cards charging over 25% or more on purchases.
Which Credit Cards are Best for Clearing Credit Card Debt?
Many credit card issuers have some kind of balance transfer card, but itâs worth remembering that credit card companies arenât interested in offering these cards to current customers. Youâll need to find a new provider and if you have multiple cards with multiple providers, that can be tricky.Â
Run some comparisons, check the offers against your financial situation, and pay close attention to late fees, APR on purchases, cash rewards, and the length of the 0% introductory APR rate.Â
Youâll also need to find a card with a credit limit high enough to cover your current debt, and one that accepts customers with your credit score. This can be tricky, but if you shop around, you should find something. If not, focus on increasing your credit score before seeking to apply again.
Here are a few options to help you begin your search for the most suitable balance transfer card:
Chase Freedom Unlimited
Bank of America Cash Rewards
Capital One Quicksilver
Blue Cash Everyday Card from American Express
Capital One SavorOne
How to Clear Debt with a Balance Transfer Card
From the point of the account opening to the point that the introductory period ends, you need to focus on clearing as much of the balance as possible. Donât concern yourself with a variable APR rate, annual fee or other issues and avoid additional APR on purchases by not using the card. Just put all extra cash you have towards the debt and reduce it one step at a time.
Here are a few tips to help you clear debt after you transfer a balance:
Meet the Monthly Payment
First things first, always meet your minimum payment obligations. The 0% APR on balance transfers protects you against additional interest, but it doesnât eliminate your repayments altogether. If you fail to meet these payments, you could find yourself in some serious hot water and may negate the balance transfer offer.
Increase Payment Frequency
It may be easier for you to repay $250 every two weeks as opposed to $500 every month. This will also allow you to use any extra funds when you have them, thus preventing you from wasting cash on luxury purchases and ensuring it goes towards your debt.
Ask for a pay rise, take on a part-time job, work as a freelancerâdo whatever it takes to earn extra cash during this period. If you commit everything you have for just 12 to 18 months you can get your troublesome debt cleared and start looking forward to a future without debt and complications, one where you have more money and more freedom.
It has never been easier to sell your unwanted belongings. Many apps can help you with this and you can also sell on big platforms like Facebook, eBay, and Amazon.Â
Sell clothes, electronics, books, games, musicâanything you no longer need that could earn you a few extra dollars. It all goes towards your debt and can help you to clear it while your introductory APR is active.
Donât Take out a Personal Loan
While you might be tempted to use a loan to cover your debt, this is never a good idea. You should avoid using low-interest debt to replace high-interest debt, even if the latter is currently under a 0% introductory APR.Â
Itâs easy to get trapped in a cycle of swapping one debt for another, and itâs a cycle that ultimately leads to some high fees and even higher interest rates.
Focus on the Bigger Picture
Debt exists because we focus too much on the short-term. Rather than dismissing the idea of buying a brand-new computer we canât afford, we fool ourselves into believing we can deal with it later and then pay for it with a credit card. This attitude can lead to persistent debt and trap you in an inescapable cycle and itâs one you need to shed if youâre going to transfer a balance.
Instead of focusing on the short term, take a look at the bigger picture. If you canât afford it now, you probably canât afford it later; if you canât repay $10,000 worth of debt this year, you probably canât handle $20,000 next year.
Alternatives to Credit Card Balance Transfers
If you have the cash and the commitment to pay your credit card debt, a balance transfer card is perfect. However, if you have a low credit score and use the card just to accumulate additional debt and buy yourself more time, it will do more harm than good. In that case, debt relief may be the better option.
These programs are designed to help you pay your debt through any means possible. There are several options available and all these are offered by specialist companies and providers, including banks and credit unions. As with balance transfer cards, however, you should do your research in advance and consider your options carefully before making a decision.
Pay More Than the Minimum
Itâs an obvious and perhaps even redundant solution, but itâs one that needs to be mentioned, nonetheless. We live in a credit hungry society, one built on impulsive purchases and a buy-now-care-later attitude. A balance transfer card, in many ways, is part of this, as itâs a quick and easy solution to a long and difficult problem. And like all quick patches, it can burst at the seams if the problem isnât controlled.
The best option, therefore, is to try and clear your debts without creating any new accounts. Do everything you can to increase your minimum payment every month. This will ensure that you pay more of the principal, with the minimum payment covering your interest obligations and everything else going towards the actual balance.
Only when this fails, when you genuinely canât cover more than the minimum, should you look into opening a new card.
Balance transfers are actually a form of debt consolidation, but ones that are specifically tailored to credit card debt. If you have multiple types of debt, including medical bills, student loans, and personal loans, you can use a consolidation loan to clear it.
This loan will pay off all of your debts and then give you a new one with a new provider. The provider will reduce your monthly payment and may even reduce your interest rate, allowing you to pay less and to feel like youâre getting a good deal. However, this is at the expense of a greatly increased loan term, which means you will pay considerably more over the duration of the loan.
As with everything else, a debt consolidation loan is dependent on you having a good credit score and the better your financial situation is, the better the loan rates will be.
Debt management can help if you donât have the credit history required for debt consolidation. Debt management plans are provided by companies that work with your creditors to repay your debts in a way that suits you and them. You pay the debt management company, they pass your money on, and in return, they request that you abide by many strict terms and conditions, including not using your credit cards.
Many debt management programs will actually request that you close all but one of your credit cards and only use that one card in emergencies. This can greatly reduce your credit score by impacting your credit utilization ratio. Whatâs more, if you miss any payments your creditors may renege on their promises and revert back to the original monthly payments.
The more extreme and cheaper option of the three, but also the riskiest. Debt settlement works well with sizeable credit card debt and is even more effective if you have a history of missed payments, defaults or collections. A debt specialist may request that you stop making payments on your accounts and instead put your money into a secured account run by a third-party provider.
They will then contact your creditors and negotiate a settlement amount. This process can take several years as theyâre not always successful on the first attempt but the longer they wait, the more desperate your creditors will become and the more likely they will be to accept a settlement.
Debt settlement is one of the few options that allows you to pay all your debt for much less than the original balance. However, it can harm your credit score while these debts are being repaid and this may impact your chances of getting a mortgage or a car loan for a few years.
Credit Card Balance Transfers is a post from Pocket Your Dollars.