Here’s how to use a balance-transfer card to pay off holiday debt
Even the most disciplined budgeters can get carried away with the holiday spirit and spend more than planned. If you find yourself in this situation, it’s unlikely that you’re alone. The National Retail Federation (NRF) expects Americans to spend 6% to 8% more this holiday season than they did in 2021, which will amount to total spending of between $942.6 and $960.4 billion.
If you’ve unexpectedly gotten in over your head during the holiday shopping season, perhaps even using credit cards to cover some of those purchases, a balance transfer card can be a good option to help you dig out of debt.
Many balance transfer cards offer 0% introductory APR rates, which can save you a great deal of money on interest and make it possible to eliminate holiday debt far more quickly.
How do balance transfer credit cards work?
Balance transfer cards allow you to shift balances from other credit cards and often feature a special low-interest rate on transferred debt for an introductory period. Because you’ll have a window of time during which no interest accrues, it’s often possible to chip away at debt principal more quickly.
“Credit card companies often offer balance transfer deals to attract new customers…Many balance transfer cards offer an introductory rate as low as 0% APR, which lasts anywhere from six to 21 months,” says debt attorney Leslie Tayne, of Tayne Law Group. “This can be a great tool for cardholders who want to pay down debt faster.”
It’s also possible to roll the balances from multiple credit cards onto a balance transfer card in order to consolidate your debts. Taking this step can help eliminate interest fees across several credit cards while also making it easier to keep track of monthly bills and avoid delinquent payments.
“Once you consolidate the balances from other cards onto the new card you just opened, all of the balances will be assessed at one low introductory rate, simplifying your payments and saving you money,” says Elly Szymanski, assistant vice president of credit card products at Navy Federal Credit Union.
What to look for in a balance transfer card
When searching for a balance transfer card, it’s important to choose carefully and read the fine print of the credit card agreement. There are many 0% credit cards on the market, but not all of them offer the same benefits, and some charge higher fees than others.
Balance transfer fees
While a balance transfer card may offer the money-saving benefit of competitive APR, there are other costs to be aware of. This includes the balance transfer fee that’s typically charged, which can range from 3% to 5% of the transferred debt.
“So, if you have a large balance to transfer, that can translate to a big fee,” says Tayne. “For example, transferring $10,000 to a card that has a balance transfer fee of 4% means $400 gets added to your balance immediately.”
When shopping for a balance transfer card, pay attention to the transfer fee each card charges and try to find a card that offers the most competitive fee possible, along with other terms that work for your needs.
While the balance transfer fee may be off-putting, in many cases, it is still a better deal over the long run than leaving your debt on a high-interest credit card, as APRs have soared during the past year. The current average credit card APR is a steep 19.4%, according to Bankrate.
“For cardholders carrying a large balance on a high-interest credit card, this fee is relatively small compared to the total amount of interest they’d pay over time,” says Tayne.
Length of introductory period
Another important point to pay attention to when shopping for a balance transfer card is the length of the introductory period on the 0% APR. Some come with just a six-month window for that special rate, while others offer almost two years without interest accruing.
You’ll want to think realistically about how long it may take you to eliminate the debt and choose a card that gives you the best chance to achieve that goal.
“You’ll want to plan to have the full balance repaid before the introductory 0% interest rate runs out,” says Amy Maliga, a financial educator with the non-profit credit counseling agency Take Charge America. “The introductory rate could last anywhere from six months to 21 months, so be sure to plan accordingly. If you’re unable to pay off the balance before the standard rate kicks in, you may end up negating any potential savings.”
When calculating how long it will likely take you to repay the debt, be sure to factor in the balance transfer fee that will be added to your principal and identify what your monthly payment needs to be to pay the full amount of your new balance.
As an added bonus when transferring your debt, you may be able to secure a new credit card that offers valuable rewards programs. This could include travel rewards, cash rewards, or some other reward that will be beneficial based on your spending patterns or lifestyle. Also, note that if you transfer a balance to a card that offers rewards, you won’t earn points on the transferred amount. Rewards generally only apply to new purchases.
Tips for paying off holiday debt with a 0% balance transfer card
Once you’ve opened a 0% interest credit card, you can accelerate the power of your balance transfer to pay down debt with these additional steps:
1. Identify areas you can eliminate spending. To maximize your debt repayment efforts, review your spending patterns and bank statements and identify areas where it’s possible to redirect money to your credit card bill. “Focus on areas where you can cut spending, such as entertainment and food, so you can make larger payments and pay off the balance transfer more quickly,” says Maliga. “You may also want to consider adding a part-time job or doing gig work and devoting your earnings to making extra payments.”
2. Make a monthly repayment plan and stick to it. Establishing a monthly repayment plan allows you to identify how much you need to pay each month in order to eliminate the balance before the end of the introductory period and also serves as a guide to keep you on track.
3. Set-up auto payments and calendar reminders. To ensure you’re staying on track with your repayment plan, consider establishing automatic monthly payments with the credit card. “I’d also recommend creating a calendar reminder for when the promotional period ends, so you can manage your spend appropriately before your rate changes. This can also help you stay on top of your budget,” says Szymanski.
Pros and cons of using balance transfer cards
There are many benefits to using a balance transfer card to help tackle your holiday debt, but also some important drawbacks to keep in mind.
Pro: 0% interest for as long as 21 months. Some of the best offers include a 0% APR for nearly two years. This is a tremendous savings at a time when the average credit card APR is nearly 20%.
Pro: More quickly pay down principal. With interest accumulation eliminated, you’re able to take charge of your debt repayment far more quickly. “This can be a great tool for cardholders who want to pay down their debt faster since payments will go 100% toward the principal balance during the intro period,” says Tayne.
Con: Balance transfer fees. Transfer fees range from 3% to 5%, and depending on the amount of your debt, this cost can add up. “The larger the balance you want to transfer, the higher the fee you have to pay,” says Tayne.
Con: May cause you to get into greater debt. The key to succeeding with your debt elimination plan using a balance transfer credit card is to not begin racking up new debt on the card—or cards—you just paid off. It’s important to be diligent about this or you could end up in greater debt.
Con: 0% expires eventually. When the introductory interest rate period ends, the new rate you’re charged could be very steep. It’s important to ensure that you have a plan to pay off your balance before that new rate is enforced or you may end up eliminating any savings you achieved.
Balance transfer cards can be a very useful financial tool to help you eliminate debt from the holidays. But they’re only a good move if you’re responsible about not racking-up debt again on the cards you just paid off. It’s also important to read the fine print when opening a balance transfer card to ensure that you fully understand when the introductory rate ends and how much you’ll pay to transfer your debt to the new card.
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