Head of Growth at Tally
July 19, 2017
It may seem counter intuitive to open a new card to pay off existing credit card debt. In reality, this tactic can save you tons of money — if you avoid the alluring traps credit cards issuers have laid out in hopes you’ll overspend.
Here’s how these cards work. Balance transfer cards offer you a temporary 0 percent interest rate to transfer the balance from another credit card. The 0 percent interest rate lasts anywhere from 12 to 18 months, depending on the card. You can then make interest-free payments for that period of time. This can help you can chip away at your credit card debt interest-free. Simple as that.
Say your current card has a 15 percent APR and you owe $6,000. If you carry that balance for a year, you’ll ultimately pay $900 in interest alone. Or, you could transfer that $6,000 to another card with a 0 percent interest rate. If you pay it off in a year on the no-interest card, you can use that $900 to pay off the card instead of paying interest.
But before you run out and apply for a balance transfer card, keep in mind what’s in it for the banks. They don’t offer these too-good-to-be-true cards out of the goodness of their hearts. They know enough consumers will make a mistake or two.
If you’re not disciplined or misunderstand how balance transfers work, you could potentially end up in more debt than you started with. Be smart about balance transfers and avoid these mistakes.
Remember that small catch with 0 percent APR balance transfer cards. Around 12–18 months after you open the card, the zero-interest good times end. Then the interest rate skyrockets. Don’t be surprised if that sweet-sounding 0 percent APR suddenly jumps to a rate that’s even higher than the interest you were paying on your previous card.
Balance transfer cards are an effective tool only if you can pay off your entire balance within the 0 percent APR window. Carrying a balance on these cards once that window ends will just end up costing you more in interest.
Bottom line: Either transfer only the amount you think you can reasonably pay off during the 0 percent APR period. Or, find another balance transfer card to move the balance to before the 0 percent period ends.
Most cards charge a fee to transfer your balance. Either they charge a flat fee or percentage of your balance, whichever is higher. The percentage is usually between 3 percent and 5 percent, and it’s an up-front cost that’s charged when you complete the transfer. First crunch the numbers and make sure the math makes sense. If you’re carrying a small enough balance, it might not be worth paying the fee just to transfer your debt to a 0 percent APR card.
If you do decide to pay the upfront fee, make sure that you use the promotional rate for the entire length that it is offered to you. If you don’t, you are paying more than what meets the eye. One extreme example: Say do a balance transfer at 5 percent and then paid off the balance in one month, you effectively borrowed at 60 percent APR!
The ideal card charges no fee to transfer balances. They do exist, and if you have a high credit score, you’re more likely to get approved.
Bottom line: Do your research and find the card with the lowest fees — or none at all.
You always want to avoid late payments for the health of your credit score. Late payments on balance transfer cards can be especially detrimental.
If you miss a payment on many of these cards, the 0 percent APR can suddenly vanish. They immediately begin charging their not-so-sweet, double-digit APR. Not only do you lose the main perk of the card, effectively dissolving the reason you got it in the first place, some issuers go as far as charging you interest retroactively from the time you opened the card.
Bottom line: Late payments can hit your credit score and wallet hard. Download Tally and let us manage all your credit card payments for you.
You’ve just wiped your slate clean and have more available credit. It’s tempting to use your old card for a purchase or two. Try to avoid this at all costs. Reason being, you could end up racking up a new balance on your old card, leaving you exactly where you started. Now instead of chipping away at one balance, you’re stuck with two.
Banks actually hope you’ll use both cards. That’s why they offer this amazing perk with 0 percent APR cards.
Bottom line: Maximizing the benefits of balance transfer cards requires discipline and self control. Focus on paying down debt, not making more of it.
You’ve stopped using your old card completely. Awesome. Why not just close it so you don’t have to worry about it? Because this could negatively impact your credit score. The average length of accounts is an important factor for your credit score. Closing an old card brings this average down, which could lead to a dip in your score.
Bottom line: Do nothing with your old card. Don’t use it. Don’t close it. Just leave it in a drawer somewhere.
If used properly, balance transfer cards are a great tool for reducing your credit card debt. Just remember why these cards are so alluring. Use your card wisely, pay off your balance within in the 0 percent APR period and say sayōnara to your credit card debt.