Now Is the Best Time in Years to Do a Credit Card Balance Transfer
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One of the most frustrating realities in personal finance is the high rate charged on credit card balances. Even if you pay more than the minimum each month, the high interest rate severely limits the effectiveness of your payment. Whether you are trying to deal with holiday debt or take control of your finances, a balance transfer can be just the thing. (See also: Why and How to Do a Balance Transfer)
And the best part? Now is a great time to do a balance transfer.
Why Transfer Balances Now?
Balance transfer deals have been ramping up in recent months. The credit freeze is thawing, and 0% APR balance transfers are being offered to more people.
During and immediately after the Great Recession, you had to have practically impeccable credit to receive these attractive offers. Now, however, with banks enjoying record profits, they are willing to take a little more risk and expand the offers. Chances are that a 0% APR offer is coming to mailbox near you.
Not only is the number of these offers increasing, but the deals are getting sweeter. The highest offers in the United States are at 18 months of that introductory rate. During the past few years, most of these offers were capped between six and 12 months. Now you have up to a year and a half to make a serious dent in your transferred debt. (See also: The Worst Ways to Pay Off Credit Card Debt)
Use a 0% Balance Transfer to Help Your Finances
Using a 0% balance transfer credit card helps you demolish your debt because your entire monthly payment goes toward reducing your principal. You don't have to worry about how big a chunk the interest payment is taking out of your payment. Here are some of the ways a 0% APR credit card can help your finances. (See also: Best 0% Balance Transfer Credit Cards)
Get Rid of Holiday Debt Fast
Even with the best intentions, many of us end up carrying balances following the holidays. It's so easy to get caught up in the season with sales, entertaining, and gift giving. Transfer your high-rate balances to a 0% APR credit card, and you have a little breathing room to pay off your holiday debt and keep it from dominating your life. Plus, you pay it off faster when everything goes toward principal. If you have cash back from rewards credit cards, apply that to your debt, too, for even faster results. (See also: How to Deal With Post-Holiday Debt)
There's no reason to let holiday debt ruin the first few months of the new year. A 0% balance transfer will help you better manage that debt. And, since you have that breathing room, you can even start saving up for next holiday season now so that you aren't in this position again.
Reboot Your Personal Finances
You can reboot your personal finances no matter the time of year, and a balance transfer can help. When you're ready to take charge of your money situation, the first thing to do is organize a debt paydown plan. A 0% balance transfer card can help your efforts. (See also: Which Debt Repayment Strategy Is Best for You?)
Manage Your Debt Better
The great thing about long introductory rates with balance transfers is that you can tackle other high-interest debt without accumulating more due to interest. Take your highest-interest credit card balances, and transfer as much as you can to the 0% APR credit card. If you have balances left on other cards, you can call to ask for a reduction in the interest rate. Account holders in good standing can sometimes see a 1% to 3% reduction in rate just for asking. (See also: What You Should Know Before You Do a Balance Transfer)
Use the Snowball Method to Reduce Debt
Once you have re-arranged all of your debt, you can then tackle the high-rate debt while paying the minimum on the 0% APR card for now. The beauty of this method is that you are paying down your high-rate cards at a faster rate, and at the same time the minimum you put toward your balance transfer card is going toward reducing that balance. Here's an example, using three credit cards:
- Credit Card A has a balance of $2,500 and a rate of 19.99%
- Credit Card B has a balance of $1,500 and a rate of 15.99%
- Credit Card C has a balance of $3,000 and a rate of 13.99%
You are approved for a 0% APR balance transfer card with a credit limit of $3,500 and an introductory rate of 18 months. The first thing you do is transfer the balance from Credit Card A and $1,000 of the balance from Credit Card B. Now you have balances of $500 (at 15.99%), $3,000 (13.99%), and $3,500 (0%).
Call your credit card issuers and ask for rate reductions if you are in good standing. Let's say you are offered a reduction to 14.99% on the one card, and a reduction to 11.99% on the other card.
After reviewing your finances, you discover that you can put an extra $300 per month toward debt reduction, on top of the minimum payments you are making on all of your cards. Start with the highest-rate card, which only has $500 on it. You put that extra $300 toward that balance and keep paying the minimum on everything else. (Don't reduce the amount you pay as the "minimum" as you progress. The minimum will drop with your slowly falling balance, but keep paying the level you started with.)
After two months, you're ready to tackle the next card on the list. Bring the $300, plus the minimum you had been paying on your other card, and add it to the minimum you have been paying on the second card. It's important to transfer the original minimum you have been paying so that your payment snowballs and gets bigger. It takes another nine months to pay off the next debt, for a total of 11 months. (See also: Guide to the Debt Snowball Method)
Now you're on to the balance transfer card. You still have another seven months to pay off this card before the 0% runs out. Remember, every penny that you've paid in the minimum balance for the last 11 months has gone toward reducing the principal. So let's say you've managed to knock off close to $1,100 of the balance. So you have seven months to pay of the remaining $2,400. Since you've moved your other minimums over, along with your original $300, you should be putting $350 or so toward debt reduction on your final card. That should be enough to allow you to finish paying off your debt before the 0% introductory period ends.
Adding a balance transfer card to the mix can be an amazing way to re-order your finances and fix your debt problem. Just make sure you create a plan that allows you to pay off the balance before the intro period runs out.
Have you taken advantage of long introductory periods on balance transfers to reduce debt? Were you successful?
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any bank, card issuer, airline or hotel chain.