A balance transfer can be a helpful tool to pay off credit card debt. To use this strategy, you transfer your existing credit card balance to a new credit card that offers a 0% interest rate for a limited time.
These rates (called introductory or promotional rates) make it easier to pay off debt faster because you can pay off your balance without added interest charges.
Sounds like a great idea, right? In theory, it is! But not always in practice. Here’s how my balance transfer experience turned into a debt nightmare — and how I was able to get out of it.
My balance transfer didn’t work because I didn’t want it
I learned about balance transfers when I was looking for an unsecured personal loan to consolidate my credit card debt. I’d already been approved for the loan, and I knew it would give me a three-year plan with an affordable monthly payment at a reasonable interest rate.
Then my friend (and fellow personal banker) told me I was crazy. “Why pay any interest,” she asked, “when you can get a balance transfer credit card for free?”
She was technically right, but at that time in my life, I was wary of getting another credit card. I was more than willing to pay some interest for a plan that guaranteed a payoff date and that didn’t enable me to fall deeper into debt.
But I took her advice anyway. I assumed logic was more important than my gut, and, in the end, I feel deeper into debt.
I didn’t have a payoff plan
Even though a balance transfer credit card wasn’t my first choice, I could have made it work. But that’s where my second error came in: I didn’t have a plan.
If you obtain a balance transfer credit card to pay off debt, that’s just the first step. Here are a few more things you have to do:
1. Find out how much you should pay per month
If you get a balance transfer credit card, don’t just pay the minimum payment due. That will be nowhere near what you need to pay to become debt-free by the time your 0% interest rate expires.
Instead, divide the balance on your card by the number of months you have until the interest rate increases. Make that your new monthly minimum, and you can pay off the balance while it’s still a no-interest card.
I didn’t do this. Instead, I paid whatever extra I could each month, thinking it would be enough to make a difference. It wasn’t.
2. Get a new balance transfer credit card if you have to
When your 0% interest rate expires, there are more implications than a higher interest rate. Your card issuer might charge your entire remaining balance at that new rate right away, causing a steep increase in your balance due.
Depending on the rate, that could undo a lot of the progress you made up to that point.
If you’re in the last month of your introductory rate and realize you won’t be able to pay the card off, get another balance transfer credit card. Then repeat step one until you’re debt-free.
3. Don’t use the card
Never use a balance transfer card for purchases. It’s best to stop using credit cards altogether until you’re debt-free, but if you need one for emergencies, don’t make it your balance transfer card.
Most balance transfer credit cards come with two interest rates: the balance transfer rate and the purchase interest rate.
The purchase rate is usually higher than the balance transfer rate. Because of this, it can make things more complicated for your monthly payments.
If you make a purchase on your balance transfer credit card, it’s going to be harder to understand how much you have to pay each month to pay the card off.
How I made it right in the end
My first foray into balance transfer credit cards sank me far deeper into debt than what I started with. Because I didn’t understand the promotional interest rate and paid only the minimum for years, my debt amount nearly doubled.
But I was able to pay it off in the end — surprisingly, with a balance transfer credit card.
The second time around, I made a plan. I divided my balance by the number of months in the promotional offer I was given and made that amount my new minimum payment. Then I diligently paid that amount every month, ensuring that I’d be debt-free by the time the interest rate increased.
I also made sure to never charge anything to that card. I got a different credit card for purchases (that I paid off in full every month) and created a savings account just for emergencies. That way I never had to use my balance transfer card.
Having a plan is much more motivating than just thinking, “I wish I could pay off my credit card debt faster.” To make a balance transfer successful, understand the terms of your credit card agreement, create a payment schedule, and be smart about your future credit card use.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|5.81% – 15.37%1||$5,000 - $100,000||Visit SoFi|
|6.87% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|5.49% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|