How a balance transfer can help you pay down debt

Smiling woman wonders how a balance transfer worksImage: Smiling woman wonders how a balance transfer works

In a Nutshell

A balance transfer card can help you pay down debt, but you should use it wisely to make sure you get the most benefit from it.
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Balance transfer credit cards can be a great option if you’re facing high-interest credit card debt. But these three real-life experiences go to show that it takes careful planning to get the most out a balance transfer.

A balance transfer card can help you pay off debt faster and save some serious money on interest. But it won’t necessarily solve all of your debt problems on its own. If you’re looking for some relief from your credit card debt, make sure you know the ins and outs of a balance transfer card before you apply.

What you should know before deciding if a balance transfer is right for you

A balance transfer lets you move your credit card debt balance onto a new credit card that likely has a 0 percent intro APR offer for balance transfers, and possibly a lower interest rate for balance transfers as well. You could transfer the balance from one card, or you may even be able to consolidate multiple credit card balances onto the new card.

But before you decide whether a balance transfer is right for you, there are some things you should consider.

Learn how to do a balance transfer in 6 steps.

1. There may be a fee.

Balance transfer cards may charge fees to complete a transfer. While some cards waive this fee for an introductory period as a special offer, others may charge a fee, typically 3 percent of the amount of each transfer.

A balance transfer is only worth it if the fee you pay is less than what you stand to save in interest. Even then, you should work out whether you can truly pay down the balance in the introductory period.

2. You may not be able to transfer all your debt.

The credit card issuer will determine your maximum (and possibly minimum) transfer limit, and the limit you’re assigned may not match how much debt you’d like to transfer. If this is the case, you may have to pay down the transferred balance and any remaining balances at the same time.

3. Is there an introductory APR offer?

You should look for an introductory 0 percent credit card APR offer for balance transfers if you’re thinking about applying for a balance transfer card.

But it’s important to know how long the promotional period lasts. A balance transfer should help you pay off debt and save money on interest since you can take advantage of the low interest rate. If you still have debt on the card when the promotional period is up, your interest rate will likely jump and you’ll be stuck with interest-accruing debt again.

With these factors in mind, read on to hear from people who have been through the process to help you decide if a balance transfer is right for you.

A balance transfer success story

For AJ Saleem, academic director and owner of Suprex Tutors Houston, a balance transfer helped him conquer debt he took on to build his company.

“I recently took advantage of a … balance transfer card offer, and it has worked out well to help my company grow and limit interest payments,” Saleem says.

Saleem transferred around $4,500 of credit card debt with a 20 percent interest rate onto a balance transfer card with an intro 0 percent intro APR offer for balance transfers for 18 months from the first transfer date. He figures he saved close to $1,500 over a period of 18 months by paying down his debt during the intro period. For Saleem, a balance transfer was a way to lower his interest expenses and conquer his debt.

“I definitely would recommend this to others, but I would still make sure to limit the spending on the cards where the balance was transferred,” he says.

This is because it’s important to keep your spending on the new card to a minimum. The ultimate goal is to pay off debt — not accrue more of it.

When a balance transfer goes wrong

Though a balance transfer can help some people, it doesn’t work out for everyone.

For Tyler Philbrook, founder of personal finance blog, the process proved to be confusing.

“At first it felt like I had paid off my debt,” he says.

Philbrook got another balance transfer credit card that had a 0 percent intro APR offer for the first 18 months. “I figured out how much I would have to pay to get it paid off in the 18 months and had a plan to do it,” he says.

Transferring nearly $7,000 of credit card debt with an interest rate of 23.4 percent onto a balance transfer card with a 0 percent intro interest offer seemed like a smart move that would help improve his finances.

However, once the old credit card was paid off, Philbrook and his wife started using the card to make purchases again, while only paying the minimum balance on the balance transfer card.

By the time the promotional period was up, they had maxed out the balance transfer card, which he says only added to the problem.

What was confusing about the process is that he thought he would be able to consolidate all of his credit cards onto the balance transfer card, when in fact it only allowed him to transfer one credit card balance.

On top of that, continuing to use his old credit card and not sticking to the plan to pay off debt during the promotional period meant that he ran up even more debt.

For Philbrook, what made the balance transfer alluring was the feeling that the debt was paid off — when in reality it wasn’t.

“Your debt isn’t gone — it’s just moved. Take what you’re saving from the transfer and put it toward the debt,” he says.

Emilie Burke of the blog had a mixed experience with a balance transfer card. While she doesn’t regret consolidating her $2,000 of credit card debt onto a balance transfer card, she said that it made her less motivated to pay off debt overall.

“I think one of the biggest motivators I’ve had while paying off my debt has been watching the amount I pay in interest,” she says. “I’m still glad I [got a balance-transfer card], but I’m disappointed in how it made me lazy.”

Bottom line

Before you apply for a balance transfer card, ask yourself: Why did you get into debt? If you don’t address the issue, getting a new credit card with a lower interest rate won’t necessarily solve the problem. For a balance transfer to truly work for you, you should be able to afford the monthly payments, be ready to change your financial picture and commit to getting out of debt.

About the author: Melanie Lockert is a freelance writer and editor currently living in Portland, Oregon. She is passionate about education, financial literacy and empowering people to take control of their finances. Her work has been f… Read more.