This article is reprinted by permission from NerdWallet.
It can seem completely counterintuitive, right?
If credit cards are what got you into debt in the first place, why on earth would you go and apply for another one as you’re trying to tackle that debt? You could risk making things even worse.
That certainly could happen. But if you have a plan — and if you strategically apply for the right kind of new credit card — it can actually be one of the best get-out-of-debt tools available to you. In this case, what you want is a balance transfer credit card.
They’re not as ubiquitous right now as they were just a few years ago, and to qualify for one you’ll likely need good to excellent credit (FICO scores of 690 and up). But they can give you a serious leg up as you work to climb out of debt. Here’s how.
How balance transfer credit cards work
With a balance transfer card, you move debt from a credit card that charges a high interest rate over to a card with a low or 0% interest promotional period. You can then make payments on that debt, at low or no interest, for however long the promo period lasts. Some cards waive interest for about a year, while others offer a low or 0% intro annual percentage rate for nearly two years.
See: 5 signs of a predatory credit card
You’ll typically owe a balance transfer fee for this, ranging from 3% to 5% of the amount you’re transferring. But it can be worth paying.
Let’s say you have a $ 5,000 balance on a card that’s charging you an APR of 17%. Moving the balance onto a new card with no interest for 18 months and a 3% balance transfer fee would save you $ 550, compared with leaving the debt on the old card.
After the intro APR period ends, the card’s “normal” ongoing APR will kick in. If you have a remaining balance at that time, you’ll begin to owe interest at that higher rate, but only on what’s left to pay off. If your plan is to wipe out the entire debt before the interest rate goes back up, you can calculate how much you need to pay each month so you can meet that goal.
Nerd tip: True 0% intro APR offers that you find on balance transfer cards are different from deferred-interest offers you may see on some store credit cards. With those kinds of offers, if you don’t pay down your full balance by the time the promotion ends, you will be saddled with retroactive interest payments on the total original amount borrowed.
Good read: Employment rose among those in California universal-income experiment, study finds
Choosing a balance transfer card
When choosing a balance transfer credit card, one of the main things to consider is the length of time you have to pay down your balance at low or 0% interest. But as you weigh your options, there are a few other questions to ask yourself:
- Will I qualify for a balance transfer card? Again, most balance transfer cards require good to excellent credit to qualify. This can change depending on market conditions.
- What is the card’s balance transfer fee? If a card charges 3% of the transferred balance, that adds $ 30 for every $ 1,000 you transfer. (No-fee balance transfer cards are rare, but a handful exist.)
- How long do I have to transfer a balance once I get my new card? To qualify for the intro APR, you may have to transfer your balance within a certain period, like 60 to 120 days. Review the terms and conditions of the card you choose so you know the deadline.
- Can I get a balance transfer card issued by the same bank as my current card? Possibly, but banks generally won’t let you move a balance from one card account to another from that same bank.
- How large of a balance can I transfer? Often, how much you can transfer from your old card is dictated by how high of a credit limit you can qualify for on the new card. It’s possible for the credit limit on your balance transfer card to be lower than your total credit card debt — but you typically won’t know what credit limit you’ll get until after you apply and are approved for the card.
Also read: 5 credit mistakes that can come back to bite you
Some words of caution
Balance transfer cards can be helpful tools when you want to save money while ditching your debt. But keep these things in mind:
- The card’s minimum payment is still due each month. In most cases, to retain the promotional APR on a balance transfer card, you still have to make at least the minimum monthly payment. Ideally, if you can pay more than the minimum due, it speeds up your overall debt-payoff timetable.
- Balance transfer cards don’t prevent “new” spending. Day-to-day expenses don’t stop while you’re aggressively paying down a balance, and balance transfer credit cards allow you to keep spending even while you’re in debt. That of course would add to your total balance due.
- A card’s intro APR may not apply to all transactions. Some balance transfer cards have separate (and higher) APRs for purchases, which means by using it to pay for everyday items, you could be re-digging the very hole you’re trying to get out of.
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Sara Rathner writes for NerdWallet. Email: srathner@nerdwallet.com.