Time to ditch that high-interest rate credit card
August 25, 2019
The big problem with credit card debt? It can bring high interest rates into your life– consumer credit cards can charge more than 20% interest on your balance, depending on the card. Because of this, it can take forever to pay down this type of debt.
Are you stuck with a credit card with a high interest rate? And do you have thousands of dollars of debt on it, debt that grows each month? You can get some temporary relief and give yourself time to pay off that debt without interest causing it to rise, by completing a balance transfer to a 0% APR credit card.
What’s a balance transfer? That’s when you open a new credit card account and transfer the debt you owe on another card to this new account. Many credit card providers offer 0% interest on their balance transfer cards for several months to new account holders who transfer their existing debt from another credit card.
Transferring your debt to a card that advertises a 0% interest offer will allow you to pay down your credit card debt for a set number of months — usually about six to 18 — without incurring any new interest on that debt.
But there are pitfalls to balance transfer credit cards. That 0% offer won’t last forever, so you’ll need to pay off your debt quickly. Also, not all credit card providers will approve your transfer request.
And worst of all? If you keep charging after you complete a balance transfer, you might end up with credit card debt on two cards instead of one.
Sky-high interest rates
According to research from Bankrate, the average variable interest rate on credit cards stood at 17.85% as of July 31. And that’s only the average. Your interest rate might be even higher, maybe higher than 20%.
Here’s why such a high rate is so terrible. Say you have $5,000 in credit card debt at an interest rate of 18%. If you only make your minimum payment each month, it will take you 271 months, or more than 22 months, to pay off your debt. While doing so, you’ll pay more than $6,524 in interest.
And that’s only if you don’t add more debt to your card. If you do, the numbers will be even harder to contend with.
That’s why transferring your balance to a credit card with a limited 0% APR offer can be so helpful. You can attack your debt without high interest rates causing it to soar.
How balance transfers work
Balance transfers are simple. Take a look at our list of best balance transfer credit cards for a credit card that offers an introductory 0% APR offer on balance transfers. A credit card’s APR – which stands for annual percentage rate – is the same as its interest rate.
Pay attention to the fine print, though. These offers are not permanent. Most providers will keep that 0% interest rate on balance transfers for six to 18 months. After that, the interest rate on any debt you haven’t yet paid off will adjust to your new card’s ongoing interest rate.
Be aware, too, that you’ll have to transfer your debt on your existing card to a card offered by a different provider. You can’t transfer the debt on your Chase Sapphire card to a Chase Freedom card. You can, though, transfer that Sapphire card debt to a Bank of America Cash Rewards credit card.
Another thing to keep in mind is that many balance transfer cards charge a balance transfer fee (usually between three to 5% of your total transfer). Do the math to make sure you’re willing to pay that fee, which can be a big chunk depending on how much debt you have.
Once you’ve chosen a card and are prepared to initiate a balance transfer, apply online for the new credit card you want. Select the “transfer a balance” or “balance transfer” option. Then provide your current card’s information, including your account number, and the amount of money you want to transfer. You might not be able to transfer your entire balance depending on your new card’s policies.
Don’t forget to continue making payments on your old card until your balance transfer has been approved and closed.
The big balance transfer mistake
A balance transfer isn’t foolproof, unfortunately. The biggest mistake? Not paying off the debt you’ve transferred to your new card before that 0% APR offer expires. Once your card’s introductory offer ends, you’ll be stuck with its new APR. This means that your unpaid balance transfer debt will have an interest rate of 17%, 19% or higher.
This defeats the purpose of a balance transfer. To avoid this mistake, create a household budget before you transfer your debt. Determine how much extra money you have each month to devote to paying down off the debt you’ve transferred. This will help you determine if the introductory 0% period –whether it’s six, 12 or 18 months – will give you enough time to pay off your debt in full.
If you do pay off your debt in time, don’t make the other big mistake: running up new debt. Make it a habit to only charge what you can afford to pay off in full each month. This way, you won’t have to worry about those high interest rates because you won’t be carrying a balance.
And when it comes to ditching that high-interest-rate card that no longer has a balance? Don’t run up new debt on that card. But don’t close your account, either.
Closing unused credit cards can hurt your credit score because of something called your debt-utilization ratio. Basically, this ratio measures how much of your available credit that your debt consumes. If you close a credit card that you no longer use, you’ll automatically reduce the amount of credit available to you. This could hurt your credit-utilization ratio even if you don’t add new debt. Ditching your high-interest-rate credit with a balance transfer can save you plenty of dollars in interest. Just don’t forget – you must still make the payments to eliminate all or at least most of that debt before your 0% offer expires. A balance transfer is a useful tool, but it’s still up to you to tackle that credit card debt.