That’s the dream, right? Pay off your debt without accruing a single cent in interest?
Well, that dream is possible with one simple credit card hack. No, it doesn’t require you to join a cult and sign over your first born or sign any crazy contracts.
All you have to do is be approved for a credit card with a 0% introductory APR on balance transfers and then transfer that debt over and pay it off before the promotion ends.
Of course, it’s not always a fool-proof plan. If don’t correctly, it’s one of the best ways to efficiently pay off debt. If done poorly, it could trap you even deeper in the debt cycle.
What is a Balance Transfer?
A balance transfer is when you transfer your credit card balance from one credit card to another, usually to take advantage of a lower interest rate or better terms and conditions. Many banks now offer a card with a 0% introductory interest rate on balance transfers, which is what you want to aim for. As long as you pay it off before the introductory period ends, you don’t have to pay any interest.
Balance transfers are also a great way to consolidate debt. If you’re paying off debt on three or four different credit cards at once, you’re paying interest on 3 or 4 cards at once, which adds up. Plus, it can be a pain to keep track of. Consolidating the debt by transferring it all to one card will save you time and money.
How Do Balance Transfers Work?
Once you’ve been approved for your balance transfer card of choice, you’ll want to immediately transfer your debts over to this new card. Typically, this can be done online, but you may have to give them a call. It can take a few weeks for the transfer to process.
As soon as a balance shows up on your new card, you want to set up a plan for repayment. The idea is to pay the balance in full before the introductory period ends, so divide the full balance by how many months you have left in the introductory period, and set up automatic monthly payments for that amount. If you have $3,000 in debt and a 12 month introductory period, for example, you’ll want to set your automatic monthly payments to $250.
If you pay off the balance in full by the end of the introductory period, congratulations! You just paid off your debt without incurring any interest fees.
Things to Look Out For When Shopping for Balance Transfer Cards
All credit cards are not created equal – not even close.
You definitely want to pay attention to the terms and conditions of balance transfer offers so that you can find the best card for your needs. Here are common features and what you should be paying attention to.
1. Promotional period, or introductory period, is the period of time in which the promotion is valid. So, if you have a 0% introductory APR offer, that 0% interest doesn’t last forever. It may last 6 months, 12 months, or if you’re lucky, 18 months. The longest one I’ve seen in the U.S. in recent years is 21 months. After that, the regular APR kicks in, which is often quite high. You want to have paid off your debt in full by the end of the promotional period.
Of course, the longer the better, but cards with longer promotional periods often offset the generous promotional period with a high balance transfer fee. They’ve got to get their money somehow!
2. Balance transfer fees are fees that most cards charge in order to do a balance transfer. They usually range from 3-5% of the total amount that you are transferring, which isn’t outrageous, but it’s significant. If you’re transferring $5,000 worth of debt, you could pay an upfront fee of $250. If the fee is less than the amount of interest you’d pay over the course of the promotional period, it’s still worth it.
There are a small handful of cards that have balance transfer offers with no balance transfer fee. These are ideal, but they often have a shorter promotional period. The Chase Slate is considered one of the best balance transfer cards because it incurs no balance transfer fee and has an introductory period of 12 months, which is not the longest, but fairly generous.
3. Transfers between the same issuer are typically not allowed. So you want to apply for a balance transfer card from a bank other than the one where you’re currently carrying debt.
For example, if your debt is on your Citi ThankYou card, don’t apply for the Citi Simplicity balance transfer offer, because the balance transfer will be rejected.
4. Do not make any new purchases on your balance transfer card. While cards will vary, many have terms that will cause your balance transfer offer to either change or be cancelled if you make a new purchase.
Many cards apply payments to the balance with the lowest interest rate, so if your card has a 0% APR on balance transfers but a high interest rate on new purchases, your payments will go toward the balance transfer amount until it’s completely paid off. Meanwhile, your new purchases will sit around accruing interest (often upwards of 15%) for that entire time period.
5. Don’t close your old accounts, even after you’ve transferred your debt and have no use for them. Cut up the cards so you can’t use them, but keep the accounts open unless they have an annual fee associated with them. Part of your credit score is decided based on your credit to debt ratio, so every time you close an account, it knocks your score down a little.
6. Pay your balance in full before the promotional period ends. This is crucial! If something happens and you are unable to finish paying the balance off before the promotional period ends, you could be hit with huge amounts of interest fees that end up being higher than what you were paying previously.
As a last resort, you can try to apply for another balance transfer offer, but you should never rely on that.
It’s not a good idea to apply for lots of cards and do multiple balance transfers in a short time period, because it knocks your credit score down a few notches, and you might not be approved the next time.
There are lots of offers out there, and they’re always changing, so be sure to do your research. The right balance transfer offer for you will depend on your situation.
Balance transfer offers were down during the recession, but we are in the golden age of balance transfer offers again. If you want to double down on your debt, now is the time to do it. As with all things related to credit, just make sure to do it carefully!