If revolving credit card debt knocks on your door on a month to month basis, it might be time to consider a balance transfer card. Of course, the main focus is to pay it and be done with it, and preferably no new purchases on it. Read more for how this technique can help you potentially save on interest, as well as get out of debt even more quickly.
Balance transfer cards can be a "godsend" for many consumers, according to Senior Industry Analyst Matt Schulz, of CompareCards.com.
How Balance-Transfer Credit Cards Are Structured
Yoni Blumberg, reporting for CNBC:
The average American borrower has a credit card balance of $5,644. If you maintain that balance and pay interest on it at a rate of 15 percent, roughly the national average, you'd pay about $850 in interest every year. If you started paying off the card at $200 per month, it would take 36 months and cost $1,360 in interest payments to wipe out the debt.
Now, let's say you transfer the balance to the U.S. Bank Visa Platinum card, our No. 1 choice for the best balance-transfer card overall, which has an introductory offer of 0 percent annual percentage rate for 20 months on any balance you transfer to the card. Assuming you transfer the entire balance of $5,644 to this card and pay it off at the same rate, it will take 30 months and cost you only $265 on top of the principal to pay it off.
That's accounting for the balance transfer fee, too, which tacks on an additional 3 percent of your balance, or $170 in this case, to your debt. It's also assuming your variable APR after the introduction period is 11.74 percent, the lowest the U.S. Bank Visa Platinum offers.
What if you use the American Express EveryDay, which requires no balance transfer fee and has 15 months of no interest? Assuming you qualify for a 14.74 percent APR, it would take you 30 months to pay off the balance and cost you only $260 on top of the principal.
Not All Payments are Created Equal
Keep in mind when you use a balance-transfer card to make new purchases, it can get complicated if the no-interest introductory offer only applies to balance transfers and not new debt. In these cases, you will have different interest rates on the balance you transferred over and the balance you accrue with new purchases.
When you make a minimum payment — which is usually 1 to 3 percent or around $25 — your credit card issuer will put it toward your balance with the lowest interest rate. If you're still in the introductory period, it will go toward the balance you transferred onto the card with a 0 percent APR. Any payment above the minimum will go toward your balance with the highest interest, thanks to the Credit CARD Act of 2009.
To offer an example, let's say your new card has no introductory APR offer for purchases and requires a minimum payment of $25. If you put $500 on it one month and then go to pay that off, your first $25 would go toward the balance you transferred over from another card, not the balance you just accumulated making new purchases.
In order to pay off what you borrowed that month in full and avoid a potentially high purchase APR, you'd have to pay off the amount you spent on the card plus the minimum payment — in this case, $525. Any additional payment would then go toward the balance with 0 percent APR that you transferred over.
If you're someone paying hundreds to thousands per year in interest on revolving credit card debt, you may want to consider consolidating your debt onto a low-interest credit card. As long as you use the card appropriately, making payments on time and not adding to your balance with purchases you can't afford, the move can help you become debt-free faster.
Additional Balance Transfer Resources
Jeff Gitlen, with LendEDU, a site dedicated to also helping consumers with their finances, has some great additional tips as well.
Also, renowned credit card info site, CreditCards.com, analyzed over one thousand balance transfer credit card offers and were able to create a guide for helping readers find the best recommendations for cards that might suit their personal goals and needs. They ranked the cards based on their ability to transfer debt and lower interest charges, among many other factors. Tips for choosing the right card and performing a balance transfer are also included.
So there you have it. What's worked for you readers when it comes to paying off debt? Have you had any success with balance transfers? Feel free to comment below!