A study by Northwestern Mutual reports that U.S. adults carry an average of $29,800 in personal debt, excluding mortgages. It can be overwhelming to think about how to manage your debt when the numbers are so imposing, but don’t worry, there are options available to help you eliminate that debt.
With a balance transfer, you may be able to cut out unwanted interest fees and focus on paying down your balance. If you can take advantage of the long introductory 0% APR periods that many credit cards offer, you may end up saving a lot of money over time.
What is a balance transfer?
A balance transfer is a method of moving existing debt onto a credit card that has a lower interest rate. The best balance transfer cards come with introductory 0% APR offers that last 12 months or more, and allow you to avoid paying interest during that time.
Interest is what you pay when you’re borrowing money from a lender. It’s a percentage of the balance you owe, normally shown as an annual percentage rate, or APR. Average credit card interest rates are about 17% — so if you’re only making the minimum payments on your existing debt, you’re mainly paying accrued interest instead of the balance.
With a balance transfer, you can refinance your high-interest debt and avoid interest charges. Additionally, if you consolidate multiple debts into one credit card payment, it becomes easier to manage your debt and make payments on time.
Most balance transfers come with transfer fees that may offset the value of using this method. With careful consideration, though, you can avoid common balance transfer mistakes and their consequences. Here’s how to know whether a balance transfer makes mathematical sense for you.
How to know whether a balance transfer makes sense for you
Step 1: Calculate your balance transfer fee
If you want to transfer existing debt onto a balance transfer credit card, you will most likely have to pay a balance transfer fee. Balance transfer fees vary by credit card, but typically range from 3 to 5% of the amount being transferred. If you’re doing a small balance transfer, you may just pay a minimum fee, typically around $5.
For example, these two balance transfer cards have similar balance transfer fees:
- Citi Simplicity® Card: This card has a balance transfer fee of 3% of each balance transfer ($5 minimum) within 4 months of account opening; then 5% of each transfer ($5 minimum) after the 4 month intro period ends.
- Citi® Double Cash Card: This card has a balance transfer fee of 3% of each balance transfer ($5 minimum) within 4 months of account opening; then 5% of each transfer ($5 minimum) after the 4 month intro period ends.
With a simple calculation, you can see how much a balance transfer fee will cost you with each of these cards:
|Citi Simplicity® Card||Citi® Double Cash Card|
|Balance transfer amount||$5,000||$5,000|
|Balance transfer fee %||3% of each balance transfer ($5 minimum) within 4 months of account opening; then 5% of each transfer ($5 minimum) after the 4 month intro period ends||3% of each balance transfer ($5 minimum) within 4 months of account opening; then 5% of each transfer ($5 minimum) after the 4 month intro period ends|
|Balance transfer fee amount||$250||$150|
|Total new balance||$5,250||$5,150|
So, after doing the math, you can see that the Citi Double Cash Card will save you $100 when it comes to the balance transfer fee. The Citi Simplicity has a $0 annual fee and the Double Cash has a $0 annual fee, so you don’t have to worry about an added expense there either.
Step 2: Calculate your interest fees
When approaching your finances, it’s essential to make a plan to pay off debt, which should include a realistic timeline for paying off your balances. For our calculations, we’ll say 12 months is a good payoff goal. The following scenarios show you three different ways to approach paying off $10,000 of debt:
Your current card
Balance transfer over 42 months
Balance transfer over 12 months
|Balance transfer amount||$10,000||$10,000||$10,000|
|Balance transfer fee %||N/A||5%||5%|
|Balance transfer fee amount||N/A||$500||$500|
|Monthly payment amount||$242||$242||$875|
|0% intro APR period||12 months||12 months||12 months|
|Time to pay off balance||63 months||42 months||12 months|
Scenario A: Paying debt with your current credit card
Let’s say you have a $10,000 balance on a credit card with an APR of 17%. The minimum monthly payment for this card is calculated by adding the interest to 1% of the balance, which equals $241.67. If you made a fixed payment of $242 every month, it would take you 63 months to pay off your debt. You’d also pay $5,146.68 in interest during that time.
The reason why it would take so long is that most of your payment is going toward interest every month. On your first payment, $141.67 of your $242 is paying interest and $100.33 is paying down your balance. This shows you how very costly it is to pay off a large balance on a high-interest credit card.
Scenario B: Paying debt with a balance transfer credit card over 42 months
Now, if you transferred your $10,000 balance to a 0% APR credit card, you could save a lot of money. We’ll say your balance transfer card has a 0% introductory APR offer that lasts 12 months. The card has a 5% balance transfer fee, so that means your fee comes out to $500. Your starting balance on your new credit card is $10,500. If you pay $242 every month, you’ll have paid off $2,904 in 12 months, and leaves you with a $7,596 balance.
Your interest rate jumps up to a regular APR of 17% when the introductory period ends. So, if you continue to pay $242 every month, it would take you 42 months to pay off your debt. You’d also pay $2,522.96 in interest during that time, plus the $500 balance transfer fee. But you do end up saving $2,623.72 in interest payments by using this method compared to leaving the debt on your original credit card. So your overall savings, accounting for the balance transfer fee, would be $2,123.72 with this strategy.
Scenario C: Paying debt with a balance transfer credit card over 12 months
The best way to use a balance transfer credit card is to pay off your debt completely during the 0% introductory APR period. For this same scenario, you would need to make monthly payments of $875 to pay off your $10,500 balance in 12 months. It’s a much higher monthly payment, but you would also avoid paying any interest, though you would have to pay the $500 balance transfer fee.
When a balance transfer could make sense
Whether a balance transfer makes sense will depend on your personal financial situation. There are a variety of factors to consider, but you can ask yourself specific questions to see what’s applicable for you.
Do you have a lot of debt or need longer to pay?
In general, the longer you plan to take to pay down your debt, the more interest you’ll accrue and the more you’ll have to pay over time. Although paying off your entire balance might seem too intimidating to address on a shorter timeline, there’s no real benefit to waiting to pay off your balance.
If you think it might take years to pay off your debt, then a balance transfer might not be the best option. The 0% introductory APR periods on balance transfer credit cards don’t last that long, so consolidating your debt with a personal loan at a lower interest rate might be more effective.
Do you have smaller debt or a card with a low APR?
If you have a small amount of debt then a balance transfer might make sense for you. Balance transfers work best when you take advantage of the intro APR periods on balance transfer credit cards — and these periods don’t last forever, generally 12 to 21 months.
So if you need an interest-free buffer for that period of time, a balance transfer could be ideal. But that’s only true if you have a plan in place to get the balance paid off before the intro period ends. Otherwise, you’ll be right back to paying high interest rates.
If you already have a low APR on your existing credit card balance, it may not be worth it to do a balance transfer. It depends on how quickly you plan on paying off the balance and whether a balance transfer fee will end up being more than the interest you’re already paying.
Are you planning on paying off your balance within the 0% intro APR period?
Balance transfer credit cards typically have high regular APRs once the 0% introductory rate has passed. This means their APRs are basically the same as any other credit card at that point, so it wouldn’t make sense to carry a balance past the promotional period.
If you’re not planning on paying off your balance within the 0% intro APR period, then you need to run some calculations to see whether it would be worth it to do a balance transfer. Look back at the three scenarios outlined earlier in the article to make these calculations and determine your best path forward.
Do you think you’ll have any late payments?
If you’re worried you might end up making a late payment on a balance transfer credit card, you shouldn’t do a balance transfer. It’s common with balance transfer credit cards that if you make a late payment, you lose your 0% APR offer. So not only will you have just paid a balance transfer fee for no reason, but you’ll be paying a high interest rate again on your debt.
Certain credit cards, such as the Citi Simplicity, have no late fees and no penalty APR for late payments, so even though it doesn’t have the lowest balance transfer fee available, if you’re worried you might miss a payment, it could be a better option for you.
How can you pick the right balance transfer credit card for you?
The best balance transfer card for you will depend on your financial goals, budget, and credit score. If you’re planning on paying down some debt quickly, a balance transfer may be able to help. Still, if you don’t have a good enough credit score, you may not qualify for certain balance transfer credit cards. Your level of creditworthiness may also not qualify for a big enough credit line to transfer the debts you have.
You can use different tools to check your credit score for free. Once you know your score, call a few credit card issuers to ask them what kind of credit history and credit score are needed for approval for their balance transfer credit cards. You can also ask about the credit limit you might receive to see whether it lines up with what you would need.
There are multiple situations in which a balance transfer could be helpful, as long as you consider the many factors involved. Remember to work through the simple calculations and see whether it would be a good idea for you.
Balance transfers, like most financial decisions, require careful planning. Take time to do the math and evaluation and it could turn out that doing a balance transfer is a great way for you to save money.
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