You may think that a new credit card is not necessary if you are in high-interest debt. You would have more credit available, which could lead to you spending more and accumulating more debt.
A certain type credit cards can help you if used correctly. A balance transfer card is the type of card you want.
Balance transfer cards: How they work
You can take advantage of the unique introductory offers on each balance transfer credit card. The majority offer 0% APR for 12 to 21 month, which means you won’t be charged interest on the transferred balances. Some balance transfer cards do charge a fee for balance transfers, which is usually 3% to 5% of your transferred balance.
Imagine, for example, that you owe $10,000 on a credit card at a 19% APR. You pay 5% of the balance each month, or $500. This rate would require 25 months to pay your debt off, and $2,120 of interest.
Let’s say that you are interested in a card with 0% APR over 21 months, but you have to pay a fee of 5% for the balance transfer. After you’ve transferred the entire balance and paid the balance transfer fee, your repayments would be $10,500 ($10,000 + $500).
You can still pay $500 per month, but you won’t be charged interest. This means that your balance will be paid off in 21 months with no interest. Your balance transfer card can cut four months from your repayment timeline , andsave $2,120 on interest.
Tips to ensure a successful transfer of balance
Balance transfer cards are popular for the reasons shown above. Some balance transfer cards charge a fee, but 0% APR from 12 to 21 months can save you thousands in interest and help you pay off your debt faster.
Experian estimates that Americans transfer between $35 and $40 billion of balances each year. It’s good news for those who take advantage of it, but also problematic because many consumers are stuck transferring debts from one balance transfer card to another every few years.
You’ll need to prepare yourself for success if you want to use a balance-transfer credit card to pay off debts and remain debt free. How to do it.
Compare Offers
You should compare several balance transfer credit cards because each one has its own introductory offer. You’ll want to choose a credit card with 0% APR as long as it takes you to pay off all or most of your debt.
You should also consider the fees, protections and perks for consumers, and reward programs when choosing a balance transfer card. Beware of balance transfer cards that offer rewards programs, if you are worried they will encourage you to spend. Balance transfer cards are designed to help you pay down your debt, not add more.
Choose cards that do not charge a fee for transferring balances
Look for cards that do not charge fees when transferring balances. There are some balance transfer cards that do not charge fees for transfers made within the first 60-days. This fee can save you between 3% and 5% on your balance, allowing you to start paying it down immediately.
Credit cards: Stop using them
You should stop using your credit card once you have transferred all of your debts to a new card with zero interest. Since the goal is to pay off your debts, you won’t be able to make purchases with your new card. However, you shouldn’t use other credit cards either because you can easily accumulate more debt.
If you are in debt repayment mode, stick to your cash budget and use debit cards instead of credit. This will prevent you from “accidentally”, adding to your credit card debt.
Create a debt repayment plan
Don’t forget to make a plan on how you will pay off debt during the introductory period of your credit card. Estimate how much you are able to pay every month, and calculate how much debt will be paid off in the end if you remain on track. You should consider if you can afford to pay your debt off over the 0% APR offered by your credit card with a certain payment amount. A good debt repayment calculator is also very helpful.
It may be a good idea to find ways to reduce your monthly spending so that you can pay more towards your credit card balance. Budget your money for the easiest things first — like groceries, dining out, entertainment, and regular trips to your favourite department store. Consider uninstalling apps that cause you to regularly spend money. This could be Instacart or DoorDash. Spending money will become more difficult, and you are more likely to start saving. You can use the savings to pay off your debts.
Bottom line
You may think that a new credit card is the last thing you need to save money if you are in debt. But a balance-transfer card can help you do just that if you approach it with the right attitude. If you want to pay off debt faster, consider a credit card with 0% intro APR. But remember that you will need to adjust your spending habits if you plan to stay out of debt.
