When Sarah and I first started our financial turnaround, one tool that helped us quite a bit to stop the financial bleeding in the short term was balance transfer offers from credit cards. These enabled us to turn high interest debt into zero interest debt for a year, and when we paired that with an intense effort to pay off our debts, we were able to clear out all of our credit card debt (well into the tens of thousands) in less than a year.
If you have $5,000 in credit card debt, for example, and that debt comes with a 33% APR, you’re adding about $1,700 in interest payments a year. Your typical minimum payment on that much debt mostly just goes to pay the interest; it doesn’t do much damage to the actual balance. Imagine that you’re making a $200 minimum payment and $170 of that is going to interest, with only $30 reducing the actual balance. Now, imagine that $200 is going entirely toward the balance instead because you don’t have any interest. That’s the power of balance transfers.
Balance transfers are pretty simple. You sign up for a new credit card that has a balance transfer offer upon signing up. You’re then given the opportunity to share your old credit card number and other info about your old account with the new credit card issuer, and then the new credit card company issues a payment equal to whatever you’d like to the old card (up to your new card’s credit limit). Your debt on your old card goes down by that amount, and your debt on the new card goes up by that amount. The advantage is that the debt on your new card has 0% interest (or very low interest) for a certain period of time, often 12 to 18 months. That’s a huge improvement over the high interest rate on your old card.
Once you’ve done that, work diligently toward paying down that debt and not increasing the amount charged on any cards.
What’s the drawback? There are several downsides to a balance transfer that you should be aware of.
For starters, most balance transfers involve some kind of fee, typically 3% of the balance transfer or $10, whichever is higher. So, if you’re transferring $3,000, you’ll have a $90 fee tacked on, for example. That’s usually equal to a couple of months of interest.
If you’re still carrying any balance on that card after the transfer offer expires, the interest rate usually goes sky high. You should aim to try to pay it off while the interest rate is zero or else try to transfer it to another card when the transfer offer expires.
You also need to have good enough credit to be approved for a new card. If you’ve been missing a lot of payments on your old card, it’s likely that you won’t be approved for a new card with a balance transfer offer.
Finally, it can be tempting, when you don’t have a good personal history with credit cards, to rack up even more debt on your cards now that there’s a lot of breathing room. If you are living a lifestyle that’s supported by credit card debt, a balance transfer is just going to dig a deeper hole for you that you’re going to have to climb out of. Don’t even bother with a balance transfer unless you’re consistently spending less than you earn and are trying to dig out of the hole. If you’re just financing an extravagant lifestyle, you’re going to end up in a far deeper mess if you start doing balance transfers.
Knowing all of this, here’s the best plan for using a balance transfer credit card offer.
First of all, ignore it unless you have significant credit card debt already in place and you’ve been keeping up with your bills. Credit card balance transfer offers really work best for people who have built up some credit card debt but are still in good enough financial shape that they’re keeping up with their bills. If you don’t have much credit card debt, they’re not going to help much at all. If you have a ton of debt and are struggling with payments, you’re likely just going to get declined for your new card.
Second, you need to have a plan in place for paying off the card, and that means living a lifestyle where you spend less than you earn. For a balance transfer offer to really pay off, you need to be able to pay off all (or at least most) of the debt that you transferred before the offer expires while also not accumulating any more credit card debt on other cards. The only way to pull that off is to live a lifestyle that’s within your means. You must be spending less than you earn consistently, month in and month out. If you’re not doing that, a credit card balance transfer is just a bigger shovel with which to bury yourself in even more debt.
There are a lot of ways to get your spending moving in the right direction. One great way is to try living without credit cards at all for a while. You just pay for everything straight from checking, so you have to live off of the cash you have on hand. Hand in hand with that approach is a “pay yourself first” strategy, where you make a big debt payment when your checking account is flush with cash from a fresh paycheck. That way, you have to live on what’s left, which means forcing yourself to cut back on unnecessary expenses.
To make that work, consider cutting back on a few bigger bills while making some smart small steps. This might be the right moment to cancel your cable or satellite bill and go with just a streaming service, saving you as much as $100 a month. You might want to consider moving to a smaller living space or taking on a roommate. Look at your monthly subscription services — things like Netflix, Hulu, gym membership, food subscription services and so on — and decide if they’re actually providing value for you.
At the same time, take a look at your other spending habits. Switch to buying store brand items at the store instead of name brands, as that adds up surprisingly fast. Cut back a little on how often you eat out and aim to eat a couple more meals a week at home. Take some simple steps to trim your energy bills and your laundry expenses. These little moves won’t make a huge difference on their own, but if you do several of them and keep up with them, they’ll definitely improve your situation and help tip the scales from spending more than you earn to spending less than you earn.
Putting all of those strategies together results in a different approach to your finances. Rather than continually adding to your credit card balance, you live without cards for a while and start knocking down the balance instead of watching it grow. Rather than making a minimum payment because you didn’t plan ahead, you make a big payment when your account is flush and then live on what’s left.
The key thing to remember is that balance transfer credit card offers are best used as a tool in getting yourself into a better financial place. They can be really effective if you use them with that mindset and really stick to that approach. If you’re not pairing a balance transfer credit card offer with other changes to your finances, they’re just going to serve as a tool to help you dig even deeper into debt, which means that the eventual road to financial stability will be even longer and more painful.
So, if you’re thinking about a balance transfer credit card offer, start by getting your financial house in order first. Begin with some real financial changes, and that means more than just a vague commitment to “start spending less.” Cancel some bills. Make some real changes to how you shop. Implement some energy improvements. Better yet, try to live without using credit cards at all, using only the contents of your checking account while still making payments on your debts. Make sure you’re paying all of your bills as you go.
When you’re able to do that, then consider a balance transfer credit card offer, as it can accelerate your progress and bring you to freedom from debt even faster by transforming your high-interest debts into zero interest debts.