This Simple Strategy Can Help You Pay Off Your Debt Once and For All
by Elizabeth Aldrich | Oct. 18, 2018
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Credit card debt hit record highs this year, with the average American's credit card bill sitting at $6,375.
Consider the fact that if you're making only the minimum monthly payment, it would take you 30 years to pay off just $2,000 in credit card debt. It's clear that increasing your monthly payments is the most effective way to tackle credit card debt, but how do you do that if you're already on a tight budget?
Penny pinching has its limits, but there is one area where nearly every credit card user could be saving more: interest fees.
If you've been paying off debt for a while now, you've probably noticed how much interest cuts into your monthly payments, especially if you've got a high APR. If you have good credit, you can significantly lower your interest rate by doing a balance transfer.
What is a balance transfer?
A balance transfer is essentially when you use one credit card to pay off the balance of another credit card. By initiating a balance transfer, the account you're transferring a balance to will pay off your other account, and your balance will then show up on the new account.
The most common reason for doing a balance transfer is to obtain a lower interest rate. If you're currently paying off $5,000 in credit card debt at an 18% APR, but you qualify for a credit card with a 10% APR, transferring your $5,000 balance to that credit card and paying it off at a 10% APR could save you hundreds, if not thousands.
If you're only able to pay $100 per month toward your $5,000 balance, transferring it to the card with the lower APR would save you roughly $2,800. You'd also pay off the balance more than two years earlier.
Many credit cards now come with balance transfer offers. These are offers of an introductory 0% APR on balance transfers for a certain period of time, which can be anywhere from six to 21 months. If you can pay off your balance before that promotional period ends, you just paid off your debt without paying a penny in interest. If you can't, however, your remaining balance will be hit with an APR that's likely even higher than what you were paying before.
Of course, there are some costs associated with balance transfers. You have to qualify for them. Most banks, though not all, will charge a balance transfer fee on the amount transferred. This fee is typically 3%, although some credit cards charge 5%.
What credit score do I need to get a balance transfer credit card?
In order to qualify for the best balance transfer offers -- that is, the offers with the lowest balance transfer fees, lowest APRs, and longest promotional periods -- you'll need to have a good credit score. A FICO Score® of 670 or higher will help you qualify for most balance transfer credit cards, although, to get the best offers and lowest APR, a score of 700 or higher is ideal.
Choosing the best balance transfer offer
There are several different factors you should consider when deciding which balance transfer offer is best for you. You'll need to know how much you're able to spend on your monthly payments and how long it will take you to pay off your debt before you make a decision.
Look for 0% introductory APR balance transfer offers -- If you can finish paying off your balance within 21 months or fewer, a credit card with a 0% introductory APR on balance transfers will minimize your interest payments.
Pay attention to the balance transfer fee -- You'll need to weigh the cost of the balance transfer fee against the money you save on interest. If you're transferring a $5,000 balance, a 3% fee would cost you $150 while a 5% fee will cost you $250. If your current APR is high, you'll likely save more than that on interest. Look for an offer with a lower balance transfer fee, or apply for one of the few balance transfer credit cards with a 0% promotional balance transfer fee, bringing your cost down to $0.
Make sure the promotional period is long enough -- You want to have your balance paid off before the promotional period ends because the regular APR on these balance transfer credit cards is generally very high. You should only transfer the amount you think you can pay off in time. Credit cards with longer promotional periods sometimes charge higher balance transfer fees, so you'll have to weigh these two costs.
Consider a low interest credit card instead -- If you're paying off a hefty balance and know you'd never be able to do it in less than two years, you could consider doing a balance transfer to a low interest credit card with a balance transfer offer. Some credit cards offer low balance transfer APRs that never expire, so while you're not getting a 0% APR for 18 months, you could be getting a 10% APR or lower for the life of your balance. In addition, many of these low interest credit cards don't assess a balance transfer fee.
The most important thing is that you do the math and make sure to choose the best offer for your needs. Once you've figured out what your monthly payment needs to be in order to pay off your balance in time, set up automatic payments so you never miss one. These offers should help you save money on interest, not cost you more.
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About the Author
Elizabeth is a writer specializing in credit cards, debt repayment, and small business. Her work has also appeared on MSN Money, Yahoo! Finance, and Business Insider.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
