Repaying credit card debt can be costly and time consuming because many credit cards charge very high-interest rates. In fact, according to the most recent data from the Federal Reserve, average credit card interest rates were at 15.09% while the average rate on cards assessed interest was even higher at 16.61%. According to Pro Publica, if your credit score is under 660, your interest rate may be as high as 27%.
Such a high rate means a large portion of every payment you make goes towards interest, rather than towards the repayment of principal. And that's especially true if you're only paying the minimum amount due on your card.
The good news is, you have another option besides simply continuing to chip away at paying off your credit card slowly over time and paying a fortune to your creditor in the process. You can use a balance transfer credit card to lower the rate you're paying and make debt payoff faster and easier.
What is a balance transfer?
Balance transfers are one of the simplest and most effective ways of reducing the interest costs on credit card debt.
When you transfer a balance, you simply move money you owe on one or more credit cards to another card at a lower rate. And the easiest way to do that is to use an existing card that has a lower rate as well as enough available credit to accept the transferred balance.
Moving your balance over to an existing card at a lower rate means you don't have to apply for new credit so you are able to complete the transfer process more quickly and easily.
Of course, you could also opt to sign up for a brand new balance transfer credit card if you're able to get approved for one. However, many card issuers are imposing more stringent qualifying requirements right now due to the financial uncertainty of COVID-19, so this isn't an option for everyone.
How does a balance transfer credit card help with paying off credit card debt?
When you transfer your debt from a credit card with a high interest rate to one with a lower one, you reduce the amount of your payment that goes towards interest each month. More of your money goes towards principal, your balance drops faster, and you become debt free sooner.
With a balance transfer credit card, the lower interest rate often means your required minimum monthly payment is lower. This could free up some cash if you have a tight budget. However, if you can afford to keep your payments the same or even increase them, you can accelerate repayment even more.
Say, for example, you owed $4,000 on a credit card with a 16% interest rate and you were paying $100 a month toward your debt. If you transferred that balance to a card charging a 9% interest rate that charged a $120 balance transfer fee and you kept your $100 monthly payment the same, you'd save $728.11 in interest and would pay off your card 10 months earlier.
Using balance transfers to reduce debt is a pro move. At Woven, we're working on tools to help you take advantage of balance transfers without a lot of extra work. You can learn more by signing up at the end of the blog post.
Should you use a balance transfer to repay credit card debt?
While using a balance transfer can save you money under the right circumstances, it's not always the best approach. Some key factors to consider include:
- Whether you have available credit on a lower-interest credit card that you can transfer your balance to or whether you can qualify for a new credit card with a special promotional balance transfer rate
- What balance transfer fees, if any, you would have to pay and how those impact the amount you would save on interest
- Whether you have a plan to repay your transferred debt in a timely manner
- Whether you're confident you won't run up a balance on your old credit card after transferring your balance, as this could otherwise leave you deeper in debt
If you have the ability to reduce your interest rate by transferring your credit card balance and you'll save money by doing so even after taking any balance transfer fees into account, then you have little to lose by moving your balance over. But you want to be sure you can responsibly make the payments on your new card and won't end up getting further into debt by charging more on your old card after you've freed up credit.
With a debt repayment plan, a budget to ensure you don't use your freed-up credit irresponsibly, and a good low-interest credit card available to you, a balance transfer could be just the solution you're looking for to make repayment cheaper and faster than you imagined.
We're working on tools to make balance transfers easy for you to accomplish. Stay connected by signing up for early access.