Having credit card debt can feel like a weight on your shoulders that you can’t seem to move.
Am I right?
Trust me; I’ve been there. It’s not a good feeling.
And all the books, blogs, and experts tell you to focus on paying it off. This is sound advice, but not always that easy to do.
With average interest rates on credit cards recently hitting an all-time high, I can understand why you may just want to give up.
There’s a way to pay your debt off faster if you buckle down with a plan a good plan. That plan is: Perform a balance transfer.
You’ve heard of them before—it’s paying off one credit card (or multiple credit cards) with another—but few people realize there’s a process involved.
In this article, I’ll walk you through the necessary steps to completing a balance transfer strategically so you can get out of debt quicker.
Let’s first start with determining how much you’re dealing with.
Figure out how much you need to transfer
Before you do a balance transfer, you need to know how much you want to transfer. If you have multiple credit cards with balances, you might be better off consolidating it all into one balance. Or you may have excellent rates, so you may only want to move bits and pieces of your debt.
Regardless, the first step to doing a balance transfer is figuring out exactly how much to move. Remember, there are costs involved in doing this, so you’ll have to decide what’s worth it and what isn’t.
When you’re looking for which balances you want to transfer, the first thing you should target is the annual percentage rate (APR) that you’re paying on each of the balances, regardless of how high your balance is. The APR determines how much you pay in interest every month on the balance you carry over and is the primary reason most people do balance transfers—to get a lower rate.
So for example, if you have a $5,000 credit card balance at 15.99% APR, you might want to consider finding a better card to transfer that balance to. But if you’re like my friend and have a 2.99% lifetime rate on a certain credit card, odds are you won’t do much better than that, so you’re best to leave that balance where it’s at.
After you’ve gone through all your credit cards and determined exactly how much you would like to transfer, it’s time to get more realistic and figure out how much space you have to do one.
Determine how much “cap space” you have on each card, or apply for a new one
Now that you know how much you need to transfer, it’s time to find out where you can move it to. There are pros and cons to opening a new card, so I’ll start with that.
Opening a new card
By applying for a new credit card, it’ll count as a hard pull on your credit report. A hard pull on your credit will result in a hit to your credit score (usually only a few points, but it can vary widely based on your credit situation).
Opening a new card will also lower your average length of credit history—which factors in the age of all your accounts (adding a brand new card will reduce the average age overall slightly). Both of these are negative factors to your credit score.
On the positive side, you tend to get the best offers for a balance transfer on new cards. Typically introductory offers, these cards will give you a great balance transfer rate for a specific period, then move you to the standard rate on the card (more on this below). You may also get a bonus for signing up for a new credit card.
If you go this route, you technically have the entire credit line to utilize—but you may not know exactly what that is until you get approved. I’ve seen customers approved for less than they want to transfer, which may put you in a bind.
For instance, you may have $20,000 that you want to transfer to the new card but are only approved for a $10,000 line. This leaves you with about $10,000 that you’re unable to transfer, so you’ll either have to find another place for it, call the credit card company and ask for a reconsideration on your credit line (which these days won’t happen very often), or keep the balance where it’s at.