3 good reasons to transfer credit card debt
A new year inspires new goals. If one of yours is to pay off your existing credit card debt in 2015, a balance transfer card may be the best tool to do it.
A balance transfer means transferring an existing balance on one credit card to another card with a different issuer. Typically, you’ll need to pay a fee – around 3% to 4% – to transfer a balance. So, transferring a $ 1,000 balance would cost you $ 30 to $ 40. On the plus side, many cards offer introductory periods of 0% interest on transfers for 6-18 months.
Here are three great reasons you might consider a balance transfer in January:
1. You want interest relief on your existing debt.
If you could choose to pay interest or not pay interest, you would probably choose not to pay. Credit card debt tends to be the most expensive type of debt due to double-digit interest rates. With a 0% balance transfer card, you’ll have six to 18 months to pay off your debt without paying interest.
Let’s do the math. Suppose you have a balance of $ 5,000 and $ 300 to invest to pay it off each month. Using a balance transfer credit card with an 18-month 0% introductory offer will pay off your debt in 17 months, interest-free. But if you don’t transfer your balance and instead choose to keep it on your 18% interest rate card, it’ll take you 19 months and you’ll pay $ 698 in interest. Even taking into account the potential 3% transfer fee, you will save $ 548 by transferring your balance.
The biggest caveat: You must create a plan to pay off your debt in full before the introductory period expires. Some credit cards retroactively apply the interest you would have accrued if you did not pay off your balance at that time. And be careful: the credit card issuer isn’t legally obligated to remind you when the introductory period ends, so be sure to keep track of it.
2. You want to improve your credit score.
The use of credit is one of the main factors in your credit score. It is the percentage of your available credit limits that you are using at any given time. Most experts recommend keeping this percentage below 30%.
Transferring your balance can improve your credit usage in two ways. First, when you transfer your entire credit card balance, your old credit card drops to a 0% usage percentage. This reduces your overall usage, as long as you don’t create a new balance on your old card. Credit cards are a great tool, but it’s a good rule of thumb to avoid using them on a daily basis until any existing credit card debt is paid off.
Second, if you transfer your balance to a card with a 0% introductory rate, you will be able to pay off your debt faster. This improves your usage faster than if you were to also pay interest on your remaining balance.
Nerd Note: Applying for new credit – like a balance transfer card – has a slight impact on your credit score. However, this factor is a much smaller component of your score, and the improvement in credit usage should far outweigh any initial drop due to new demand.
3. Your credit card debt cannot be paid off in six months or less.
Even with existing debt, a balance transfer card is not always the best option. For example, if you have a balance of $ 2,000, but you can afford to spend $ 750 a month on it, you will only pay $ 27 in interest with an 18% interest rate. A 3% balance transfer fee would set you back $ 60, so it’s smarter to just pay off your debt and eat the small interest payment.
Evaluate the cost of interest you’ll earn against the balance transfer fee to decide if it’s worth transferring your time and money. And keep in mind that you can find balance transfer cards with no transfer fees if you have good credit.
Bottom Line: If you want to save on interest and improve your credit score, you should get a balance transfer credit card in January. Just make sure that your credit card debt can’t be paid off in six months or less, and that the interest you’ll save outweighs any potential balance transfer fees you’ll have to pay.
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