Credit Card Debt can be stressful, and high interest rates can make it tough to pay down your balance. If debt pay down strategies, like the snowball or avalanche method, aren’t for you, a balance transfer can be a smart solution.
What is a balance transfer?
A balance transfer is when you use a loan or credit line with a low interest rate to pay an outstanding balance on a credit card account with a higher interest rate. The goal is to save money while paying off your balance.
How does a balance transfer work?
Once you’ve researched your options and applied for balance transfer, the process is simple, with your monthly repayment clearly spelled out.
1. Do your research
Since you’re trying to minimize costs, do your research and try to find a balance transfer with 0% introductory APR, no annual fee and no balance transfer fee. If you don’t prequalify for accounts with these terms, shop for the best available options.
2. Apply for the balance transfer
Most balance transfers can be initiated online or by phone. Typically, you’ll need to provide information about your income and credit score and about the debt being transferred, including the issuers, the amount and account information.
3. Wait for approval
It can take two weeks or even longer for your balance transfer to be approved. Once approved, the issuer of your new account will pay off your old account. Then the old balance will show up in your new account.
4. Start paying down the balance on the new card
Start making the monthly payments on the new account. Try to pay off the balance during the 0% APR introductory period. This will save quite a bit of money and pay the debt down faster, clearing it before the low introductory rate expires and new, higher rates are applied.
When should you use a balance transfer?
While a balance transfer is a good option for credit card debt with high interest rates, it’s not a one-size-fits-all solution for everyone. There are several things to consider when deciding if a balance transfer is right for you.
If your current card carries a high interest rate, your credit score is good to excellent and if you can qualify for a card with a 0% introductory APR, then a balance transfer is an option you should seriously consider.
But if your current card already has a low interest rate then there’s not much advantage to switching to a balance transfer. Also, if you have a low credit score, you might not qualify for a low-interest balance transfer. Another thing to consider: after the promotional period ends, you could end up with a higher rate on the balance you haven’t paid off..
What are alternatives to balance transfers?
Balance transfers are not the only solution to high-interest credit cards. Here’s a few alternatives.
1. Debt consolidation loan
You can consolidate all of your debt by taking out a debt consolidation loan for the total amount you owe. Debt consolidation loans are similar to balance transfers, except that the loan is only for one lump sum, while a balance transfer is revolving line of credit you can use again and again after repaying your balances.
2. Request a lower interest rate on your current card
Call your card issuer. You may be able to negotiate a lower interest rate on your current card. You will have to meet certain requirements to qualify, including a healthy credit score.
3. Use professional debt management
Debt management companies can offer good advice and guidance on how to pay off your debt. These professionals are trained to guide you through the process by laying out all of your options. They will help you decide which option is best for you. But try to work with non-profit organizations, which typically guide you without a profit motive for themselves.