Doing a credit card balance transfer is a common method for dealing with credit card debt that’s getting out of control. There’s lots to consider before moving forward with one though. Expert Cory Santos explains, to our reader Hetti, what to do and know when it comes to doing a balance transfer.
The question
The answer
Hi Hetti,
First of all, it’s great that you’ve not only identified a problem but are taking the steps to help it get fixed. Second, you aren’t alone, as official data shows that Canadians are carrying more credit card debt than ever before.
A balance transfer credit card can be a useful tool for paying down debt quickly, but it’s important to approach it carefully to avoid worsening your financial situation. If you fail to pay off that balance before the promotional period ends, you’ll need to begin paying interest at the regular APR, typically around 23%.
Before transferring a balance
Before considering a balance transfer card you need to look at the requirements for applying. Many balance transfer or low APR credit cards require at least a “good” credit score (a score of 660 to 724) to qualify.
You’ll also need to factor in the balance transfer fee (if there is one). Transfer fees range from 2.5% to 5%, with the average being around 3%. That would mean you would need to pay a fee of $71.67 to transfer your balance. Make sure to factor this into your calculations to see if the transfer will actually save you money.
Before you transfer your balance, create a realistic repayment plan. Calculate how much you need to pay each month to eliminate the debt before the introductory period ends. This will help you avoid high interest rates once the promotional period is over.
Given your current balance of $2,389, plus the $71.67 balance transfer fee, you’ll have an outstanding balance of $2,460.47. Opting for a balance transfer offer of 0% APR on balance transfers for 10 months with a balance transfer card, you would need to pay off $246 worth of debt each month to avoid paying interest.
After transferring your balance, try to avoid using the new card for additional purchases, as this can only make the situation worse. Instead, focus heavily on budgeting. Additionally, keep track of your payments and remaining balance. Regularly review your budget to ensure you’re on track to pay off the debt within the promotional period.
How to choose the right balance transfer card
When choosing a balance transfer credit card, consider the interest rate and fees associated with the card. Look for a card that offers a low or 0% introductory APR for balance transfers, and make sure this applies for a specific period of time. Check for any charges related to balance transfers, such as balance transfer fees, annual fees, or other costs that could affect the overall expense of transferring your credit card balance (and paying it off).
Tips for using a balance transfer card
- Create a repayment plan: Outline your required monthly payments and set a debt-free goal. Be realistic about what’s possible and dedicate the energy required to stick to it.
- Pay on time: Set up automatic payments or reminders. There is a grace period for payments at the end of your billing cycle, but missing it will result in late fees and potentially a penalty APR.
- Avoid new charges: Focus on existing debt before new purchases. Avoid putting new purchases on your account, including cash advances. Avoiding new charges will also help you reduce your credit utilization rate, one of the biggest credit score impactors according to the leading credit bureaus.
- Monitor credit score: Track progress in paying down debt and monitor your credit health. Most card issuers provide access to your free credit score each month, so take advantage!
Other alternatives
If a balance transfer doesn’t sound viable, don’t worry, there are other steps you can take to address credit card debt:
Contact your card issuer and ask if you can negotiate a lower interest rate
Many people don’t realize you may be able to negotiate your interest rate with your credit card company or bank. While not all credit card companies may be open to negotiation, it is worth reaching out to your provider and expressing your desire for a lower interest rate. Be prepared to provide reasons why you believe you deserve a lower APR, such as a good payment history or a competitive offer from another credit card company.
Consider a personal loan
A personal loan (or a debt consolidation loan) is another option to consider. The benefit of a debt consolidation loan is essentially the same as a balance transfer card: the chance to pay off your debt with one single monthly payment. Personal loans tend to have lower interest rates than credit cards. Additionally, there are more options for a wider credit profile, including subprime credit, so if you are struggling to find a balance transfer card that works for you, a debt consolidation loan might be a good choice.
Alternative repayment methods
If you discover a balance transfer card isn’t right for you, don’t worry, there are still proactive steps you can take to tackle your debt. These options include repayment strategies known as the debt snowball and debt avalanche methods.
Both the debt snowball and debt avalanche methods are effective for paying down credit card debt. The debt snowball method involves paying off smaller debts first while making minimum payments on larger debts. This provides a sense of accomplishment and motivation as smaller debts disappear. The debt avalanche method focuses on paying off debts with the highest interest rates first, saving more money in the long run.
Final thoughts
Summing it all up, the fact you are addressing your ongoing credit card debt problems is wonderful. Your overall debt burden is well within the average range and there are options available, depending on your credit health, debt-to-income ratio, credit use and other factors. Ensure that you maintain discipline with spending and monitor your credit score. If a balance transfer isn’t right for you after all, there are alternative repayment methods and repayment techniques designed to help you get debt-free. Best of luck with your debt repayments.
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