3 Moves to Make Before Doing a Balance Transfer

by Maurie Backman | Updated July 21, 2021 - First published on Jan. 25, 2021

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Before you move over your credit card balances, take these important steps.

If you owe money on a few different credit cards, you may be considering a balance transfer. A balance transfer lets you move your existing balances onto a new card with a lower interest rate -- ideally, an initial 0% introductory rate. Not only can it make your debt more affordable, but it can also make it easier to pay off. After all, it's easier to remember to make a single payment each month for one credit card than keep track of various due dates. But while a balance transfer can be a good way to consolidate debt, it pays to make these moves before rushing in.

1. Boost your credit score so you qualify for a better offer

Just as you'll need decent credit to qualify for a regular credit card, so too is having strong credit important for a balance transfer. That's especially true if you want one with a 0% interest period and other favorable terms. If your credit score needs work, you can raise it by:

  • Paying your incoming bills on time
  • Checking your credit reports for errors
  • Asking your existing credit card issuers for a higher spending limit, which could help your credit utilization ratio drop (that's a good thing as far as your credit score is concerned)

2. See if a personal loan makes more sense

A balance transfer can save you money, but you may not qualify for a 0% introductory offer. If that's the case, you may get stuck paying an interest rate that, while lower than your current one, is still high. That's why a personal loan may be a better choice.

You can borrow money for any reason with a personal loan. So you can take out that loan, use its proceeds to pay off your credit card balances, and then pay that single loan back in monthly installments. Personal loans generally charge lower interest rates than credit cards. Also, personal loan balances don't count toward your credit utilization ratio, so moving your debt over to a personal loan could help improve your credit score.

3. Look at a cash-out refinance

If you owe money on your credit cards but you're also thinking of refinancing your mortgage, there may be an easy way to consolidate your debt and make it less expensive to pay off. It's called a cash-out refinance, and it allows you to borrow more than your outstanding mortgage balance and use the extra cash for whatever purpose you choose.

Say you owe $150,000 on your mortgage and have $10,000 of credit card debt on cards charging 14% to 18% interest. If you qualify for a cash-out refinance, you could borrow $160,000 instead of the $150,000 you'd borrow with a regular refinance. From there, you'd use the first $150,000 to pay off your existing home loan and then take the remaining $10,000 and pay off your credit cards. Then, you'd make a single mortgage payment each month until you've paid that entire $160,000 back. Given today's refinance rates, if your credit is decent, you could qualify for a refinance at under 3%. That's a lot less expensive than paying 14% to 18% interest.

A balance transfer is a great way to consolidate debt and make it cheaper to pay off, but don't rush into it. Instead, make sure your credit score makes you eligible for attractive offers, and explore alternate solutions that may be more cost-effective. With a little work, you can knock out your existing credit card debt in the most affordable manner possible.

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