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Paying off credit card debt is an uphill battle—especially when the majority of your minimum monthly payment is going toward interest. Getting out from under double-digit interest rates even temporarily can make a big difference. You’ll see your balance drop faster as you make payments, and it will help motivate you not to get stuck paying high interest on your entire balance again.
Balance transfer credit cards are an important weapon in your war on debt. You open a new card that has a temporary grace period during which you don’t have to pay interest at all—usually 12 to 15 months—and move balances from other cards onto the new one. After the introductory period, the interest rate bumps back up to a more typical 15% or so.
You can generally transfer balances from as many cards as you like, as long as you stay within the new card’s credit limit.
This sounds like a no-brainer, but keep in mind that most balance transfer offers involve a fee for moving the balance from your old card. A typical fee is 3% of the balance—so, for example, you’d be charged $300 on a $10,000 balance. To figure out if it’s worth it to transfer, you need to figure out how much you’ll save in interest over the life of the 0% APR period, and compare that to the balance transfer fee. In most cases, you’re likely to come out ahead by taking this tactic, but do the math to be sure.
Balance transfers also allow you to consolidate your debt. Moving balances from multiple cards, or even from other high-interest debts like payday loans or car loans, can whittle your payments down to just one a month. That makes budgeting easier and helps you keep track of due dates so you don’t accidentally make credit-ruining late payments.
It’s smart to have a plan for paying off your entire debt before the zero-interest period expires. But even if you still have a small balance remaining when the interest jumps up, you’re likely to be better off than you were—unless you continued to rack up debt during the intro period. Just because a credit card offer gives you zero interest on balance transfers doesn’t mean new purchases are interest-free, and you can’t control whether the credit card company applies your payments to new purchases (which are accruing interest) or the balance you transferred. This is a sneaky way credit card companies make money on you, so be alert.
What to do with older accounts
You should also avoid closing your old credit cards after you move the balances. Keeping older accounts open is good for your credit score, and it’s especially worth it if there is no annual fee on the older cards. But it’s up to you to exercise discipline, and not build up any large balances on those old high-interest cards. If you’re worried about it, try keeping the accounts open but leaving the cards stashed away at home so you won’t be tempted to use them.
Here’s the reality: Getting out of credit card debt may take you longer than it took to build up the debt in the first place. But being smart about interest rates will ease your way. Imagine how good it would feel if your entire payment every month was going toward your loan principle, taking you that much closer to becoming debt-free.