Paying down credit card debt with a high-interest rewards card is like hammering a nail with a screwdriver. Possible? Sure. But it’s not the best tool for the job.
With good credit, you could tackle the problem much more efficiently with a different approach: Move your balance to a just-for-debt credit card.
A just-for-debt card is an account you use for only one purpose: to obliterate your outstanding charges. And it’s perfect for that job, specifically because of its long introductory 0% balance transfer APR offer and other debt-friendly features. Managed carefully, this could be the card that shrinks your balances to zero fastest, without charging you a penny in interest.
How it works
The trouble with carrying a balance and making new purchases on the same card is twofold: It can cost you plenty in interest charges, and it can make it difficult to see where you stand on both spending and debt payoff goals.
Getting a separate credit card specifically for zapping outstanding balances can solve both these issues.
This just-for-debt credit card strategy can be boiled down to three steps:
- Get a just-for-debt card — that is, a credit card with 0% balance transfer APR and other debt-friendly benefits so you can pay down your balances interest-free. (More on that later.)
- Transfer your balance to the new card. You’ll likely have to pay a fee to move this debt, but your savings on interest could easily make up for that cost.
- Pay off that debt and don’t make new purchases. Use your just-for-debt card solely for paying off debt. Put new purchases on another credit card that you pay off in full every month. Or, if you prefer, use a debit card.
By carefully managing this account while keeping your spending on other accounts in check, you could save hundreds on interest. Plus, using a card just for paying off balances could make it easier to track progress at a glance.
When you get a monthly bill for a just-for-debt card, “you know that that balance is representative of what you did last month,” says Thomas Nitzsche, a spokesman for the nonprofit credit counseling agency Money Management International. “It’s much easier to organize in your head.”
Make the most of it
Here’s how you can make your just-for-debt credit card work for you.
Choose the right card. When you’re paying off debt, you don’t want the card that offers the biggest rewards and largest sign-up bonuses. Instead, you’ll want a card that minimizes your costs. A top-notch balance transfer card has:
- A long introductory 0% balance transfer APR offer. (Note that a card’s balance transfer APR, which is applied to debts moved from other cards, is different from a card’s purchase APR.)
- A reasonable balance transfer fee or none at all (a typical fee is 3% to 5% of the balance transferred)
- No annual fee
Generally, you need good or excellent credit to qualify for these cards. Before applying, note that major issuers also don’t allow same-issuer transfers. For example, you can’t transfer a Chase balance to another Chase card.
Planning to finance a single large purchase instead of transferring a balance? Look for a card with an introductory 0% purchase APR offer. These are different from deferred interest financing deals.
Read the terms. With some cards, even small slip-ups can be costly. For example, many introductory 0% APR offers can be voided with a single late payment, leaving you with a much higher interest rate for the remainder of the promotion and, often, a late fee. Before using a new card, take note of these potentially expensive pitfalls.
“The customer really has to pay attention to the cards, the terms, the expiration dates [of promotional offers], the due dates and the minimum payment requirements,” says Nessa Feddis, senior vice president for consumer protection and payments at the American Bankers Association, an industry group.
Make a plan. A just-for-debt credit card is “a good budgeting tool,” Feddis says. “But it has to be managed.” That’s why it helps to have a debt payoff plan.
To start, calculate how much money you can reasonably afford to put toward debt each month, aiming to pay off your balance within your just-for-debt card’s promotional 0% balance transfer APR window, if possible. Then, on the card you’re using to make purchases, give yourself an achievable monthly spending budget.
As your situation changes — say, your expenses spike, or your income increases — take a look at your accounts, readjust and keep going.
This article was written by NerdWallet and was originally published by Forbes.