One of the easiest ways to save money on debt is reducing the interest rate you must pay. This doesn’t magically eliminate or reduce what you owe; however, if you use the savings to pay down your balance, you can eliminate debt faster.
I’ve frequently used balance transfer credit cards to pay zero interest on debt and save money. Keep reading to find out how these cards work and five smart tips to make no-interest cards pay off.
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What Is a Balance Transfer Credit Card?
A balance transfer credit card is just like a regular credit card, except that it includes an incentive to transfer balances from other accounts. You typically pay 0 percent interest during a promotional period in the range of six to 18 months.
Every balance transfer offer is different, depending on the issuer and your financial situation, but the longer the promotional period, the better. You don’t accrue one penny of interest until the promotion expires.
During the promotional period, you must make monthly minimum payments. Not paying on time means your sweet 0 percent interest could be ripped out from under you and replaced with a default rate as high as 30 percent. That could easily wipe out any benefits you hoped to get by doing a balance transfer in the first place.
When you’re approved for a balance transfer card, you’re given a credit limit, just as with other types of credit cards. You can pay off just about any debt, such as a credit card or an auto loan, in an amount up to your transfer card’s credit limit.
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You set up the transfer online or use paper convenience checks to send funds to the account you want to pay down, and then the paid-off balance moves to your transfer card.
Be aware that there’s usually a one-time fee for amounts you transfer, in the range of 3 percent to 5 percent. For example, if you transfer $1,000 to a card with a 3 percent transfer fee, you’ll be charged $30, which increases your debt to $1,030.
However, some cards don’t charge a fee if you complete a transfer during a limited period, such as within 60 days of opening a new account. So, be ready to make the move once you’re approved, so you don’t miss the savings opportunity. If you don’t make the deadline you can still complete a transfer, but a fee would apply.
5 Tips for Using Balance Transfer Credit Cards
Now that you understand how transfer cards work, here are five tips I use to make them pay off.
- Transfer your highest-interest debts first. Let’s say you have a $5,000 balance on a card charging 22 percent interest and move it to a card that charges 0 percent for the first 12 months. You’d save about $875 during the promotional period, which could go toward paying off your balance. That helps reduce the time it takes to get out of credit card debt.
- Take advantage of no-fee transfer offers. Getting a 0 percent no-fee card offer is a no-brainer. I can’t think of an easier way to temporarily save money.
- Maintain good credit. The length of the no-interest offer and the available credit limit you receive depends largely on your credit. So, building or maintaining great credit will allow you to qualify for the best balance transfer credit cards.
- Don’t make new purchases on the card. A transfer card typically only offers 0 percent interest on transfers, so depending on the standard rate, it may not be a good option for new purchases.
- Have a payoff plan. I never use a transfer card unless I have a solid plan to pay off the balance before the promotional rate expires. When the music stops playing and the promotional period ends, you might get stuck with a higher interest rate than you started with. That’s why it’s important to know what the card’s regular interest rate will be after the promotion.
If you can save money during the promotional period despite any transfer fees, you’ll come out ahead. And, if you plow your savings back into your balance, instead of spending it, you’ll get out of debt a lot faster than you ever thought possible.
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