PIN IT!If you’re carrying a balance on a credit card, you’re probably already aware that it’s costing you big time in terms of interest. If you make the minimum payment each month, it could take you years to pay off your debt, and you could end up paying thousands in interest — interest rates are often so high that credit card users wind up paying back double what they borrowed and then some.
But, if you have good credit, there’s a way to pay off at least some of your credit card debt without interest. It’s called a credit card balance transfer. Balance transfer credit cards typically waive interest for six to 18 months in return for a balance transfer fee (though some cards waive this fee). Basically, transferring a credit card balance from one card to another card means you’re using one credit card to pay off another. You’re not getting out of debt, but the break from interest could save you hundreds.
Your Credit Must Be Excellent
If you’re thinking of using a balance transfer credit card as a tool to help you pay off debt, you need to have great credit to quality. Banks just aren’t handing out credit these days the way they used to; you’ll need a credit score of at least 720 in order to qualify for a balance transfer card. Those with scores above 750 will qualify for the best rates and longest no-interest introductory period. However, a high FICO score may not be enough; you’ll also need a credit utilization ratio of less than 50 percent, meaning you’re using less than half of the credit available to you.
If you’re thinking of getting a balance transfer card, check your credit report ahead of time. If your FICO score isn’t good enough, there may be steps you can take to boost your credit, including paying down your credit card debt to improve your utilization ratio.
Make Sure It’s Worth It
Most credit card balance transfers aren’t free; the issuing bank profits from the deal by charging you a balance transfer fee, usually 3 to 5 percent of the total balance transferred. Before choosing a card, educate yourself and make sure the deal will benefit you. Ask yourself these questions:
- What’s the introductory interest rate?
- How long does the introductory period last?
- What’s the APR going to be after the introductory rate expires?
- How much will your new minimum payment be?
- What’s the balance transfer fee?
Federal law states that your introductory interest rate must last at least six months, but you may be able to find a card that offers a low or nonexistent intro rate for nine to 18 months or more.
Be honest with yourself with yourself about how long it will take you to pay off your credit card debt. If you think you’ll be able to pay off the debt before the introductory rate expires, that’s great — but remember that you’ll still be paying that balance transfer fee. Calculate how much you’d pay if you kept the debt on your old card and paid it off with interest, especially if you think you can pay off the debt in just a few months. If the balance transfer fee works out to be more than your expected interest, you may be better off without the balance transfer.
If you think you’ll need more time than the introductory period offers to pay off your debt, it could still be a good deal. Work out how much of the balance will remain when interest kicks in, and how much interest you can expect to pay on that remaining debt. Also, make sure the balance transfer will cover your entire credit card debt; if not, pay off the old card as fast as you can while making minimum payments on the new balance transfer card.
Use Your Balance Transfer Wisely
If you decide a balance transfer card is the right financial tool for you, use it responsibly to achieve your goals. Don’t close the old card after you pay it off; that can damage your credit. Instead, keep it, and charge a small purchase once a month to help improve your credit.
Pay off as much of your balance transfer as you can before the introductory rate expires, to make the most of the opportunity to save on interest. Make your payments on time; otherwise, the issuer could revoke your intro rate. Be aware that new purchases on the balance transfer card may not qualify for the introductory rate, but could cause you to accrue interest under the card’s normal APR. You may want to avoid making new purchases on your balance transfer card so that your payments go directly, and entirely, toward paying off your balance.
A balance transfer credit card can help you pay off credit card debt without paying interest. Use this financial tool wisely, and you’ll soon find yourself much closer to achieving your personal finance goals.