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Sean Talks Credit: When Making a Balance Transfer, Look for 0% APR First

Oct. 27, 2015
Balance Transfer Credit Cards, Credit Cards
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Sean Full Res 3Q: I have around $10,000 in credit card debt spread out over a few different cards. Should I transfer all the balances to a low-interest card I already have, or apply for a new low-interest card?

A: First off, give yourself a pat on the back for taking steps to strategically pay down your large credit card balances. When you have a five-figure debt, the lower you can get your interest rate, the more money you’ll save in the long run. But you should also recognize that the two choices you’ve laid out for yourself are not your only options, or necessarily your best ones. I know from personal experience — paying off $12,000 in credit card debt interest-free — that it’s possible to do better.

A regular low-interest credit card can certainly save you money when paying off debt, but a card with a 0% APR on balance transfers would save you even more. With such a card, you can move your debt from another account and pay it off interest-free over several months, which is how I ended up saving about $5,000 on interest. You can — and should — look for the best terms available, regardless of your debt and credit situation.

Multiple credit card issuers offer new cardholders an introductory 0% APR period on balance transfers for up to a year or more. But you’re smart to ask whether applying for an entirely new card is the best solution for you. There are four situations in which it might not make financial sense for you:

  1. You have a 0% APR offer on one of your current cards. Many issuers regularly offer 0% APR balance transfers for existing cards — it seems like my Discover card sends me one every other month — so keep your eyes open. If you’re already carrying a card with an active 0% APR offer for balance transfers, you could move your debt to that card rather than going through the hassle of applying for another (and taking the short-term hit to your credit that the application could inflict).
  2. Your credit is poor, or you already have too many hard inquiries on your credit reports. Most 0% APR balance transfer deals require you to have good or excellent credit. If you can’t qualify because of your credit score or credit inquiries, consider transferring a balance to a low-interest card you already have, assuming the savings on interest outweigh the balance-transfer fee. Such fees typically are 3% to 4% of the amount transferred. For example, if your debt is on a card with 20% APR and the balance transfer fee is 3%, then you’ll need to transfer to a card with an APR below 17% to be better off.
  3. You can’t qualify for a limit that’s high enough. If your chances of qualifying for a new card with a credit limit above $10,000 are slim, you may be better off paying down the cards you already have as quickly as possible. Tackling the highest-interest debts first can save you more money.
  4. You have trouble controlling your spending on credit cards. Certainly, if you’ve had trouble controlling your credit card spending in the past, and another card in your wallet is too much of a temptation, I wouldn’t advise you to apply for a new one. If you struggle to keep your finances under control, getting a personal debt-consolidation loan at a local credit union or community bank may be a better alternative. The relatively low interest rates could save you some money, and the structured payments may encourage more discipline.

For many, though, a new balance transfer credit card is the most cost-effective way to pay down debt. In some cases, getting a balance transfer credit card and moving a debt over may even improve your credit slightly.

So if you decide to apply for a balance transfer card, which one should you get?

If you can pay off your debt within a year or so, you may opt for a card that offers a shorter 0% balance transfer APR period but gives you other benefits, such as rewards or perks. Otherwise, you may want to look for the longest 0% balance transfer APR period available. A few cards offer 0% periods of 18 to 21 months. 

MORE: NerdWallet’s Best Balance Transfer and 0% Interest Credit Cards

Remember, moving your debt to a 0% balance transfer credit card is just the first step to becoming debt-free. When I was paying off my credit card debt, I did everything I could to maximize my income and minimize my spending to pay down the debt as quickly as possible. If you really want to avoid paying credit card interest, you need to develop a debt payoff plan and stick to it. It may take months or years to chip away at your balance, but with steady progress, you can pay off all of your debt without shelling out a penny of interest.

Photo of Sean McQuay by NerdWallet.