Advertisements promoting zero-percent balance transfer offers can look quite appealing when high-interest credit card debt is keeping you up at night. What could be better than transferring your debt to a credit card that won't charge any interest for a year or more? Apart from stumbling upon a hoard of cash that could be used to pay your balance off in full, not much.
The truth is a balance transfer may be the easiest way for you to manage your own debt and save thousands in finance charges, but it's important to do your homework before moving forward. To choose the best credit card for your personal situation, maximize savings, and minimize fees, be sure to remember the following five tips:
All Cards are Not Created Equal
Consumer rule #1- Shop Around! Each credit card offer has its advantages and disadvantages, so be sure to use a reputable source that will help you make an educated decision regarding the best card for your needs.
The online credit card marketplace provides consumers with more power than ever to compare and contrast the best offers in the industry and apply securely online. Take a few minutes to browse through our recommendations in the 0% Interest Credit Card Section, or contact your current credit card issuer to see if they are offering any special promotions. There are also balance transfer credit cards for fair credit available, though by and large these offers are reserved for consumers with good-to-excellent credit.
Read the Fine Print
Yes, this can be painfully boring, but it's the most important part of the process. If you don't understand all the terms associated with the credit card offer, you may end up paying fees and incurring a much higher interest rate than expected. Here are some key things to think about as you decipher the terms and conditions:
- Does the advertised rate apply to balance transfers, purchases, or both?
- How long is the introductory period, and what is the APR after the promo rate expires?
- Is there a balance transfer fee or an annual fee? Can it be waived?
- Is your credit good enough to even qualify for the advertised teaser rate?
- If you miss a payment during the introductory period, will the advertised rate increase? If so, by how much?
Do the Math
As you organize your plan for paying off the transferred debt, be sure to do some simple math so you can set a goal for how much you will pay each month and how long it will take to reduce the balance to zero.
For example, let's say you're transferring a $5,000 balance from a high-interest credit card to a balance transfer card with a 16-month zero-percent introductory rate. Remember it's common for a balance transfer offer to include a fee, which could be 3 percent or more of the amount transferred, so include this fee in your calculation as well. You may be able to call the credit card issuer and convince them to waive the fee; however, that is getting more difficult these days as companies are looking for every way possible to increase their fee revenue.
A 3 percent fee will cost you $150 in this scenario, so the total balance to be paid off will be $5,150. Therefore, to pay off the balance before the 16-month introductory period ends, you will need to pay approximately $322 per month.
If that sounds like too much to handle financially, read the fine print in the credit card offer to determine what the interest rate will be after the introductory period ends. Decide how much you can afford to pay each month and then calculate what the remaining balance will be at the end of the introductory period. For example, if you pay $250 per month for 16 months, the remaining balance will be $1,150. Let's say the interest rate jumps to 15% after the introductory period. If you continue to pay $250 per month, it will take about 5 more months to pay off the debt and you will only incur $42 in interest.
Based upon these calculations, your goal should be to pay off the debt in 21 months with only $42 in interest charges. Compare that to paying $250 per month on the original high-interest credit card charging 25 percent, and you will save almost $1,500 in interest charges while paying your debt off 6 months earlier.
Choose and Move
Once comfortable with the terms and conditions of the offer that best fits your personal situation, apply for the credit card and carefully fill out the balance transfer form. You will need to gather your current account information so you can give the new credit card company the account details of the credit card balance you want to transfer.
In addition, the balance transfer may take anywhere from two to four weeks to process, so it's a good idea to continue making payments on your old credit card until you receive written notification from the issuer that the balance is zero. Once it is, don't use the card to make any new purchases until you have completely paid off the balance on the new credit card. You may even want to consider closing the account or negotiating with the credit card company to obtain a lower interest rate.
Make it Easy - Automate
Much like saving for retirement, automation is the key to success when it comes to making credit card payments and building a good credit score. Immediately enroll for online account access when you receive the new credit card, and set up automatic payments so you will never be late again.
The rest is easy. Utilize the plan you developed above to pay off the balance as fast as possible, automate payments online, and enjoy watching your net worth grow.
