Why Balance Transfers Can Be a Smart Way To Pay Off Debt

If you’re carrying a hefty balance on one or more credit cards, getting a lower interest rate on a new card could be just what you need to conquer your debt.
5 minute read | 5/16/19May 16, 2019
paying off debt with balance transfer

Imagine you owe $10,000 to a loan shark and the interest is piling up. With each passing day, the debt becomes more difficult to pay off. Now, let’s pretend that instead, you owe that $10,000 to your mom. What a relief! $10,000 is a lot of money to owe no matter how you slice it, but your mom will probably give you a lower interest rate and more time to pay off the debt.

That’s kind of how a balance transfer works. It’s a process that allows you to move a balance from one of your current credit cards to a new credit card. The goal is to get a (much) lower interest rate so you can pay off your debt faster.

Balance transfers in a nutshell

Using a balance transfer to pay off debt can be a smart strategy for many people. When you sign up for a new balance transfer credit card, it typically comes with an introductory APR that’s lower than what you’re paying on your current credit card.

Those with good credit can qualify for some of the best cards that offer extended periods of time with a 0% introductory APR. This means you won’t pay a cent toward interest during the introductory period, and all of your money can go to paying down your balance. The introductory period can last 15 months (sometimes longer) and add up to huge savings when you hit the pause button on paying interest.

Even if you have to pay a balance transfer fee, the decrease in interest you’ll be paying can take years off the life of a loan. You’ll be free of debt faster, and instead of putting your hard-earned money towards interest, you can use it to invest in your future.

Why balance transfers can be a lifeline

If you’re wondering if balance transfers are a good idea, the answer depends on your total balance, current interest rate, and the introductory offer on the card you’re considering.

It also depends on how much you’ll be able to put toward monthly payments.

According to the Federal Reserve Bank of St. Louis, the current average APR on credit cards is about 15%, so we’ve used that figure in our example below, along with a common introductory offer for balance transfer cards. This compares the total cost and time to pay off a $10,000 balance. As you can see, the savings can be significant:

Total Balance Balance Transfer Fee APR Monthly Payment Time to Pay Off Debt Total Cost to Pay Off Debt
Current Credit Card $10,000 N/A 15% $500 24 months $11,579
Balance Transfer Card $10,000 3% 0% for 15 months, then 15% $500 21 months $10,398.13

By making regular $500 payments each month, you could pay off $10,000 of debt three months faster. You could also save more than $1,000 by transferring your balance from a card with a 15% APR to a card with a 0% introductory APR. That’s a lot of extra money in your pocket — and less time stressing about debt.

If your interest rate is already very low or you’re able to make larger monthly payments, then you may want to forgo getting a new card.

For example, in the following scenario, you would end up paying less by keeping your current card than by completing a balance transfer on a new card.

Total Balance Balance Transfer Fee APR Monthly Payment Time to Pay Off Debt Total Cost to Pay Off Debt
Current Credit Card $10,000 8.5% $1,500 7 months $10,280
Balance Transfer Card $10,000 3% 0% for 15 months, then 15% $1,500 7 months $10,300

If your card already has a low APR and you think you can pay off the debt in a reasonable amount of time on your own, a balance transfer card may not be the right choice for you.

Also, if you don’t think your credit is good enough to be approved for a 0% introductory offer, you may want to consider a different repayment strategy.

Best balance transfer cards to consider

You have several options when it comes to balance transfer credit cards — many of which also offer a variety of rewards and other perks. If your main goal is to pay down debt, however, you’ll want to look at the introductory APR, how long the intro APR is good for, and if there’s a balance transfer fee.

For example, the Chase Slate credit card offers a $0 introductory balance transfer fee (for balance transfers made within 60 days of opening your account) along with 0% APR for the first 15 months. There’s also no annual fee and no penalty APR, so you won’t pay higher interest rates if you’re late on a payment.

Getting the most out of your balance transfer credit card

Now that we’ve covered why balance transfers can be a fantastic way to get out of debt, let’s go over how to get the maximum value out of your card. Here are a few ways:

1. Commit to paying off the debt before the intro offer ends

This requires some budgeting and planning, but it will save you from paying a higher interest rate later on.

2. Transfer your balance soon after opening the account

Most card issuers only offer the introductory balance transfer fee and APR on balances transferred within a certain timeframe. And even if you have two months to complete the transfer, it’s best to complete the transfer immediately so you can take advantage of a lower rate right away.

3. Take advantage of rewards offers

It might be a good idea to put purchases on your new card as well, if the rewards benefits are robust. But the ultimate goal should be paying down debt, so any purchases you make should be needs and not wants.

Look at the available rewards for all of the cards in your wallet and strategically decide which purchases to put on each card. For example, if one of your cards offers double points on grocery store purchases, make that your go-to shopping card.

Once your debt is paid and your credit score improves, you can qualify for even better rewards cards. Then you’ll be free to use your income for the things you want, rather than putting your money towards debt repayment.

How to know if a balance transfer is right for you

To determine if a balance transfer is the right choice for you, ask yourself:

Can I take a short-term hit to my credit?

Applying for a balance transfer card can negatively impact your credit in the short term. While most inquiries have minimal effect, if you’re hoping to apply for a mortgage loan in the near future, it’s probably best to hold off on opening a new card for now.

Can I pay off my debt quickly without a lower rate?

If you can comfortably pay off your debts in a short period of time and your APR is already low, you may lose money by completing a balance transfer, unless your card offers a $0 introductory balance transfer fee.

Would another type of credit card consolidation work better for me?

Opening a balance transfer card isn’t the only way to pay off debt through consolidation. There are several options for credit card consolidation you should consider before making the choice to apply for a balance transfer credit card.

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