Getting rid of large amounts of credit card debt can be a Herculean task. Because cards charge extremely high interest, making minimum payments can actually cause your balances to grow over time instead of shrink. Paying down this kind of debt fast enough to stay ahead of the interest snowball may require a huge chunk of your disposable income. However, there's one easy way to negate the high-interest handicap.
A balance transfer is a way to move a debt from one creditor to another. When you initiate a balance transfer, the new creditor pays off the old creditor, and then you start making payments to the new creditor instead. All the major credit card companies will allow you to transfer debt from another credit card over to them. Some will also allow balance transfers for other types of debt, although this is not as useful an option, as other kinds of debt tend to carry much lower interest rates.
How balance transfers can help
On the face of it, moving your debt from one creditor to another doesn't sound particularly helpful. However, the new creditor is typically willing to compensate you for handing over your existing debt by giving you a special deal on the transferred debt. Most balance transfer offers include a period of low or even no interest on the debt. These offers are ideal for getting your credit card debt paid off once and for all.
Starting the balance transfer game
The first step in the balance transfer dance is finding a card that has a fair amount of available credit and that will extend you a good balance transfer offer. This may require getting a brand-new credit card if all your existing cards are maxed out or close to it. Unless your credit is truly terrible, getting a new card with a good balance transfer offer is usually quite easy; in fact, some cards specialize in offering balance transfers. You want a card that will offer you the lowest possible interest (preferably none) for several months. Most balance transfer offers include a fee, so factor that in when deciding which card to use.
Your first transfer
Let's say you've managed to find a new card with an introductory balance transfer offer of 0% interest for the first six months. It's unlikely that you will be able to get rid of all your debt in six months, but if your entire payment is going to principal rather than interest, you should be able to make a nice dent in it. If the available credit on the new card isn't enough to hold your entire existing credit card debt, transfer over the highest-interest balance first, and then the next-highest-interest balance, and so on until the new card is full. Then pay as much as you can to that card each month, making only minimum payments on any other cards that still have balances. Do not use your balance transfer card to make purchases, as those purchases will be charged interest and will set back the whole process.
Let the musical chairs begin
In the above example of a six-month offer, once you've been making payments for four or five months, it's time to start looking for a new balance transfer offer. When you moved your highest interest debt over to the new card, you probably emptied out an old card. Check with that card issuer to see if they're willing to give you a balance transfer offer at a low or zero rate of interest. If that issuer isn't interested, you may have to go shopping again for a new credit card. Once you've secured another balance transfer offer, wait until you've hit the last three or four weeks of the old balance transfer period and then initiate a new transfer. You'll want to give yourself a few weeks' leeway, because the payment from the new balance transfer card may take a while to make it over to the old card issuer, and you don't want to get stuck with a fat interest charge if you can help it.
A quick warning: If you plan to use balance transfer cards to wipe out debt, you need to pay the transferred balance off as quickly as possible. In fact, in the best-case scenario, you won't have to transfer your balance more than once. Each new account you open may lower your odds of getting approved for the next one; after all, credit card companies don't like to see too many credit applications in a narrow time frame, and they definitely aren't keen on customers who never pay a dime in interest.
And if you fail to pay off the transferred balance within the introductory-rate period -- or even if you fail to make a single payment on time -- you'll likely trigger a much higher interest rate than you were paying on your previous card. That could be financially devastating.
Keep calm and carry on
As you continue to pay down your debt, your credit score will likely increase, meaning that more and better balance transfer offers will become available. That will make it easier for you to keep moving your balances around and paying them off interest-free. And of course, the more of your debt you can move over to balance transfer cards, the less will be stuck sitting on other cards and charging you interest, meaning your payments will be doing the most good by going entirely to the principal of your debt. Once you get all of your debt tucked away under no-interest balance transfers, it's just a matter of keeping up your payments until the entire debt is gone.
The Motley Fool has a disclosure policy.