Credit card debt is like weight gained during the holidays: so easy to rack up and yet so difficult to get rid of! While debt is a normal part of life, it becomes a problem when it’s more than you can manage. Between minimum payments, high interest rates, and a balance that never seems to decrease, credit card debt is some of the hardest to shake.
If you’re being held back by your credit card debt, you may have heard of a credit card balance transfer as a potential solution. While this method of paying off debt sounds like a great option on paper, there are some things you should know before you pursue it.
How Do Credit Card Balance Transfers Work?
Let’s say you’ve found yourself with a high balance on a credit card that also has a high interest rate (APR), but you’ve found another credit card that has a low or even 0% APR. If you transfer your high balance to that new card, then you effectively stop paying interest on your original amount and can really chip away at your actual debt! By doing this, you’re able to pay your balance faster and save yourself money in the long run.
When Would I Use a Balance Transfer?
Typically, there are three situations where a balance transfer is a good move for tackling credit card debt.
1) Your debt is saddled with a high interest rate
If your debt is attached to an account with a high interest rate, a balance transfer may be able to save you money if you move that debt to a low-interest account.
2) The promotional offer for the balance transfer card is great
Especially if you’re lucky enough to get an introductory 0% interest rate on a card, a balance transfer to an account with a low rate could help you pay off your debt faster. By reducing (or eliminating) the interest you pay on the transferred balance, a good promotional offer can help you achieve your financial goals.
3) You’re having trouble juggling multiple monthly payments
With so many bills and expenses to keep track of, multiple monthly payments on credit card debt can sometimes slip through the cracks. If you use a balance transfer to combine your debts, however, you’ll find yourself with fewer monthly payments to manage.
What Are the Risks of Balance Transfers?
In theory, balance transfers are a simple fix for your credit card debt woes. The reality, however, is a bit more complicated than that. There are risks to balance transfers you need to be aware of before you apply for a card.
Balance transfers have limits
Unfortunately, there’s really no way of knowing what your credit limit on a card will be until after you’ve already applied – and there’s a chance it won’t be high enough to transfer all of your debt. If, for example, the card you plan to use for a balance transfer has a $5,000 limit but you have $7,000 worth of debt, you wouldn’t be able to move all of your debt. Additionally, some cards have limits on how much you can transfer, which defeats the purpose of the card in the first place.
You’ll need good credit
The cards that are best for balance transfers generally require a good or even excellent credit score. If you’ve found yourself saddled with a lot of debt, chances are your credit score may also be weighed down. This means that those who would benefit the most from a balance transfer often have trouble qualifying for a good card.
There may be hidden fees
With most balance transfer cards, there is a 3%-5% fee to move your debt over to the new card. That means that someone who transfers a $6,000 balance to a card with a 5% fee, for instance, would now have to pay off $6,300.
If you’re not careful, you can add to your debt
As with most debt repayment strategies, if you don’t address the root cause of your debt and create a plan, you could end up falling deeper into debt with your new credit card. Worse yet, if you don’t pay off your existing debt within the low-interest promotional period, you’ll end up just shuffling your debt around instead of dealing with it.
What Are Some Alternatives to Balance Transfers?
Balance transfers aren’t the right fit for everyone. Your debt situation is unique, and you need to choose the repayment method that works best for you! There are many alternatives to balance transfers, including the debt avalanche, debt consolidation, and debt settlement methods.
The idea here is to pay at least the minimum amount towards all of your debt. Any funds you have leftover after that should be put towards the debt that has the highest interest rate. Once that debt is paid off, move onto the second most expensive debt, then the next, until everything is paid off.
Debt consolidation involves taking out a personal loan that carries a lower interest rate than your other debts. Once you’ve secured this loan, you use it to pay off your credit cards or other debts. This consolidates your debt into one affordable, easy to manage monthly payment.
If you’re having difficulty making even the minimum payments on your debt, then it may be time to consider debt settlement. Either you or a company working on your behalf will contact your creditors and begin negotiating a one-time, lump-sum payment that can be 10%-50% less than what you currently owe. Once the terms are agreed upon and you pay that lump sum, your debt is considered forgiven. To learn more about debt settlement and see if it’s the right option for you, check out this blog.
Debt Relief That’s Right for You
At the end of the day, it’s important to understand that the path to debt relief isn’t one-size-fits-all. If a balance transfer card worked for a friend or loved one, that doesn’t necessarily mean it will work for your financial situation. That’s why our debt specialists at ACCS are here to help you find your perfect debt solution, no matter what it may be. At no cost and no obligation to explore your options, you can be sure that our team is here to help put you in control of your financial life. Request a Custom Debt Relief Plan today!