If you have high-interest credit card debt, chances are you can benefit from a balance transfer—as long as you understand how it works and you make a plan to take advantage of it. A balance transfer involves moving debt from an existing credit card or loan to a new credit card that offers a low or 0% introductory APR for a designated period of time. The promotional period usually ranges from 6 to 24 months. To get the most savings out of your balance transfer credit card, follow these expert tips.
Understand the Terms of the Balance Transfer Offer
Before you even apply for your new card, make sure you understand the terms of the introductory offer. (It is important to note that most credit card issuers require good to excellent credit to qualify for a 0% APR offer.)
First, find out if there are annual fees and balance transfer fees associated with the card. While cards with no annual fee are common, most lenders charge a balance transfer fee ranging from 3 – 5% of the amount being transferred.
Next, make sure you understand the terms of repayment. How long is the interest-free introductory period? What happens if you are late on a monthly payment? Some cards may revoke your intro APR if you do not pay on time.
Finally, find out the APR (Annual Percentage Rate) on new purchases, the APR after the promotional period, and any perks or rewards, such as cash back, that are available. In many cases, the intro APR on new purchases is not the same as the APR on balance transfers. You may be charged interest when you make new purchases unless you pay off your entire balance in full, so it is often a good idea to avoid using your new card for purchases until your balance transfer is paid in full.
Transfer Debt with the Highest Interest Rate First
Now that you have your new card, take time to make a list of your balances and associated APRs. If you are carrying balances on several credit cards or loans with high annual percentage rates, transfer the debt with the highest APR first, and then transfer as much of the rest as you can. You may not be able to transfer all of the debt, depending on the credit limit your new credit card company has extended to you.
Make a Repayment Schedule
Based on the transfer amount and the length of the introductory APR period, calculate how much money you would need to pay each month to pay off the debt in full. If you can’t afford to pay this much, pay as much as you can each month, as long as it is more than the minimum monthly payment. Always pay on time to avoid losing your promotional APR.
Help Your Credit Score By Keeping Accounts Open
By paying down your debt, you will improve your credit utilization ratio, which is an important factor in calculating your credit score. But when your credit card balance gets to zero, whether it’s because you transferred the balance to a different card or you paid off your debt, don’t close your old account. When you close an account, it reduces your credit history and hurts your credit utilization ratio. It is best to keep your existing credit card accounts open and use them to make small purchases that can be paid off in full each month.
If you’d like to make better headway by paying off your high-interest debt, TDECU offers credit cards with no balance transfer fees and 0% introductory APR on balance transfers. Apply online today. <