Story written by Erin El Issa of Nerd Wallet via USA Today
A new year inspires new goals. If one of yours is to pay off your existing credit card debt in 2015, a balance transfer card may be the best tool to get it done.
A balance transfer means transferring an existing balance on one credit card to another card with a different issuer. Typically, you’ll have to pay a fee – around 3% to 4% – to transfer a balance. So transferring a $1,000 balance would cost you $30 to $40. On the bright side, many cards offer introductory periods of 0% interest on transfers for 6 to 18 months.
Here are three good reasons you might consider a balance transfer this January:
1. You want interest relief on your existing debt.
If you could choose either paying interest or not paying interest, you’d probably choose not to pay. Credit card debt tends to be the most expensive type of debt out there due to double-digit interest rates. With a balance transfer card with a 0% offer, you’ll have anywhere from six to 18 months to pay off your debt without paying interest.
Let’s do the math. Say you have a $5,000 balance and $300 to put toward paying it down each month. Using a balance transfer credit card with an 18-month 0% introductory offer, you’ll pay off your debt in 17 months, interest-free. But if you don’t transfer your balance and instead choose to keep it on your 18% interest rate card, it will take you 19 months and you’ll pay $698 in interest. Even factoring in a potential 3% transfer fee, you’ll save $548 by transferring your balance.
The biggest caveat: You need to create a plan to pay off your debt in full before the introductory period expires. Some credit cards retroactively apply the interest you would have accrued, if you don’t pay off your balance by this time. And be careful: The credit card issuer isn’t legally obligated to remind you when the end of the introductory period is coming up, so make sure you’re keeping track of it.
2. You want to improve your credit score.
One of the major factors in your credit score is credit utilization. That’s the percentage of your available credit limits you’re using at any given time. Most experts recommend keeping this percentage below 30%.
Transferring your balance can improve your credit utilization in two ways. First, when you transfer your entire credit card balance, your old credit card goes down to a utilization percentage of 0%. This brings down your overall utilization, as long as you don’t run up a new balance on your old card. Credit cards are a great tool, but it’s a good rule of thumb to avoid using them daily until any existing credit card debt is paid off.
Second, if you transfer your balance to a card with a 0% introductory rate, you’ll be able to pay down your debt faster. This improves your utilization more quickly than if you also had to pay interest on your remaining balance.
Nerd note: Applying for new credit – like a balance transfer card – results in a small hit to your credit score. However, this factor is a much smaller component of your score, and the improvement in credit utilization should far outweigh any initial drop due to a new application.
3. Your credit card debt can’t be paid off in six months or less.
Even with existing debt, a balance transfer card isn’t always the best option. For instance, if you have a $2,000 balance, but you can afford to put $750 toward it monthly, you’ll only pay $27 in interest with an 18% interest rate. A 3% balance transfer fee would cost you $60, so it’s smarter to just pay off your debt and eat the small interest payment.
Weigh the cost of the interest you’ll accrue against the balance transfer fee to decide whether or not it’s worth your time and money to transfer. And keep in mind that you can find balance transfer cards without transfer fees if you have good credit.
Bottom line: If you want to save on interest and improve your credit score, you should get a balance transfer credit card this January. Just make sure your credit card debt can’t be paid off in six months or less and the interest you’ll save outweighs the potential balance transfer fee you’ll have to pay.