Just so you know: Life Before Budget has partnered with CardRatings for our coverage of credit card products. Life Before Budget and CardRatings may receive a commission from card issuers. Also, the content of this article as well as comments from users are not meant to be professional financial advice and have not been reviewed by the advertisers. Please read our disclosures page for more details.
Guess what?
If you want to pay off debt, I have a really great guide that will help you. In this guide, it will tell you that getting out of debt involves a ton of hard work.
There is no magic pill that will automatically get you out of debt. Balance transfers are NOT a magic pill that will get you out of debt automatically.
However … if you have high interest credit card debt, then balance transfers can be a great way to help get out of debt. I’ve even used them as I worked to get rid of over $400,000 in debt.
Unfortunately, I know that balance transfers can be a little bit intimidating, especially for people who have a lot of credit card debt. For many people, credit cards have helped us get into debt, so it doesn’t seem right that they can also help us get out of debt. Again, balance transfers will not automatically get us out of debt. Only hard work, spending less, and making more will do that. But balance transfers can help!
Let’s take a look at how balance transfers can help us to get out of debt. But first, let’s figure out what they actually are.
What is a balance transfer?
Simply put, a balance transfer is moving the money that is on one credit card to another. Of course, the key is to use your balance transfer to move your high interest rate debt to a credit card with a lower interest rate.
When you are looking to do a balance transfer, it often helps to open up a new credit card. Many times, these new credit cards will offer a balance transfer that has a 0% rate for 15 or 18 months. However, they also typically come with a fee of 3-4% on the amount of money transferred. Check out this link if you want to compare the fees and balance transfer rates for a variety of cards.
A case study
Many of us have high interest credit card debt. As an example, let’s say that I had $10,000 in credit card debt with a 19.9% interest rate. Over 18 months, this means that I would pay $2,985 in interest on this debt!
But what if I used a balance transfer?
Although I would have to pay a fee of 3% on the balance, or $300, a balance transfer would give me an interest rate of 0% on my outstanding debt.
Using a balance transfer would save $2,685 on my credit card interest.
Even better than that, a balance transfer could help us to pay down our debt. Instead of sending $2,985 in interest to a credit card company, we could pay down our debt by that amount or even more!
A step-by-step balance transfer guide
By now, we’ve established that balance transfers could save you money on your high interest rate debt. But will they actually save you money? And how can you make sure that you are saving the largest amount of money possible? Let’s take a look at this with a step-by-step guide.
Step 1: Determine the interest rate of your debts
If you don’t have any high interest rate debt, then balance transfers won’t make much sense for you.
For instance, Tim has the following interest rates on his debt:
Mortgage: 4.5%
Car loan: 3.9%
Student loan: 5.9%
Although Tim could lower the interest rate on his student loan by using a balance transfer, he should be very careful with a balance transfer unless he has a specific plan to pay off his credit card debt before the balance transfer period is up. If Tim doesn’t pay off his debt in time, he could be stuck with an extremely high interest rate when 15 or 18 months are up.
For Sally, balance transfers may make sense:
Mortgage: 3.8%
Car loan: 9.9%
Credit card debt: 17.99%
Because she has high interest car debt and credit card debt, balance transfers may be a good option for her.
Step 2: Compare and choose a balance transfer credit card
Whenever you are shopping for something, it always makes sense to compare a variety of options. The site that I use for this and have partnered with is called CardRatings. This website lists dozens of great balance transfer cards and their fees and interest rates for ease of comparison. If you click here, you will be redirected to this comparison page.
When you are looking to get a card for a balance transfer, you should mainly focus on three things:
1. The Balance Transfer Intro APR
2. The Balance Transfer Intro Period
3. The Balance Transfer Fee
Always look for a 0% intro APR, the longest possible introductory period, and the lowest possible transfer fee.
After you’ve compared a few cards, you are now ready to make your decision and apply.
Step 3: Apply for the card
As you are filling in your information online to apply for a new credit card, you will notice a spot on the application that says something like “transfer balances.” This is the spot where you will fill in the information from the credit cards whose balances you want to transfer to your new card.
After you get accepted for the new card, make sure that you continue to pay the payments on your old card until you’re informed that your balance transfer has gone through.
Step 4: Make a plan to get out of debt
At this point, you’ve gotten rid of a lot of your high interest rate debt by successfully transferring it to a new credit card.
So you’re completely done, right???
Not so fast …
If you want to truly take advantage of the new interest rate on this balance transfer, then now is the time to get serious about paying off your debt. Even though some of your debt has a really low interest rate on it right now, this rate will eventually expire and the debt will still be outstanding unless you make a plan to get rid of your debt!
For instance, we will assume that you just completed a balance transfer of $10,000. As we talked about before, a balance transfer of this size saves you around $2,685. If you pay down your debt with this savings, then you’ll be down to $7,315 in debt.
Paying $500 more per month will get you out of debt in 15 months!!!
And getting out of debt was the goal when you started using balance transfers to help with your debt. I know that it is difficult to get out of debt. As a matter of fact, my wife and I are still working to get rid of our mortgage debt. So we definitely understand the struggle. But after we figured out why we wanted to get out of debt, it got easier to make the necessary sacrifices.
Step 5: The balance transfer intro period is over and I’m still in debt! Now what?
I completely get it. You may not be able to get out of debt during the 18 month balance transfer intro period. Maybe your debt was too high to begin with or life happened and you just couldn’t pay down your debt fast enough. No matter what happened, if the intro period is up, then your credit card may be increasing it’s rate to 19.9% or some other high rate that you don’t want to pay.
At this point, you may look into doing another balance transfer to a different, brand new credit card. Even though it takes a few minutes to apply for another credit card, it will be worth it because you can save thousands of dollars.
After applying for a new credit card, you probably also want to take a few minutes and analyze the past 18 months. Did you do everything in your power to get rid of your debt? If not, is there something more that you can do over the next 18 months? Whether you did a great job in the past or not, you should still start to get out of debt today!
Next Step
By now, you have probably determined whether or not you should get a new balance transfer card. If you think that you should get a new card, then check out this link to compare dozens of balance transfer credit cards.
Be sure to let us know how you plan to use your balance transfer card.
And thanks for reading!
~Nathan
Let’s keep living a great life … with the help of money. So what’s next?
- You can travel for free by using rewards credit cards.
- You can get motivated and get out of debt.
- You can check out the next post or previous post and continue to learn.
But no matter what you decide to do, let’s leave the ordinary behind and take action today!
Just so you know: Life Before Budget has partnered with CardRatings for our coverage of credit card products. Life Before Budget and CardRatings may receive a commission from card issuers. Also, the content of this article as well as comments from users are not meant to be professional financial advice and have not been reviewed by the advertisers. Please read our disclosures page for more details.
