How to Reduce Credit Card Debt by Balance Transfers

You can transfer your balance and save money.

Depending on the amount you owe on your credit card, you may be able to save money by transferring the balance to another card. When done properly, a balance transfer can help you pay down your debt faster by temporarily disposing of high interest charges. Special rules may apply to keep your low introductory rate. Evaluate the advantages and disadvantages thoroughly before initiating a balance transfer. The best way to do this is to read your new credit card agreement and understand what you are signing before transferring your old balance.

Things You'll Need

• Credit Card Balance

Instructions

1. Investigate the balance transfer options available to you. Balance transfers offer low introductory rates, but each credit card company offers these rates for different lengths of time. Introductory rates are interest rates that are temporarily very low. Sometimes you are not required to pay interest at all during this period. The average introductory rate continues for six months, but some companies offer these rates for up to a year. The longer you can take advantage of a low interest rate, the more you can save.

2. Ask about balance transfer fees. Both your current credit card provider and your new one can charge a percentage of your balance to complete a balance transfer. This fee can be as high as 5% of your total debt. If the debt on your current credit card is very high, these fees can negate what you will save by transferring your balance.

3. Read the fine print on your transfer agreement. Making any purchases on an account after a recent balance transfer could cause your introductory rate to prematurely default to the standard interest rate. Also check the spending limit on the new card ahead of time. If the amount of your transfer is greater than the limit on the new card, you could immediately lose your introductory rate in addition to being charged fees. Any late payments on the account during the introductory period could also cost you your low rate (see Reference 1).

4. Compare the interest rate on your new card after the introductory period expires with the interest rate on your current card. Ideally the rate should be equal to or less than what you are paying now. If the interest rate on your current card is lower, you may save more money over time simply by leaving your balance where it is.

5. Transfer your balance. After the transfer, pay down as much of your debt as you can during the introductory period. The more of the debt you are able to pay off at a low interest rate, the more you will save on the long run in interest charges.

6. Keep your old card open. The length of your credit history has an impact on your credit score. Closing your old card can lower your score -- especially if you have had the card for a long time (see Reference 2). Taking small steps like this to preserve your credit rating will save you on future purchases that must be financed. Lenders look at your credit rating when determining what sort of interest rate you should pay on a personal loan or a mortgage. The better your credit score, the lower your interest rate will be. Low interest rates save you money over the life of a loan.

References

• Balance Transfer Pitfalls: Automatic Increases
• Weird Stuff That Hurts Your Credit