How Do Credit Card Balance Transfers Work?
How They Work
Balance transfers allow individuals to move debt such as credit card balances, a medical bill or even a car loan to a lower interest, or no interest, rate on a credit card for a limited amount of time. The total amount you can transfer and the time required for the balance transfer to be completed depends on the credit card company.
“How can I make sure I’m getting the most from my balance transfer?”
Transferring outstanding debt to a credit card with an introductory 0% annual percentage rate (APR) can be a great way to consolidate bills and save money on interest. Discover and other credit card companies can offer introductory 0% APR balance transfers for limited periods of time varying between a few months to over a year. Knowing how to take advantage of these introductory rates can help you pay down debt quicker, Here are some tips that could help you get the most out of your balance transfer:
Prioritize Your Debt by Highest Interest Rates
Start by understanding the different interest rates of your credit cards. Assuming two different cards with the same balance, the card with the higher interest rate may have a higher monthly payment. The easiest way to identify the interest rate on your card is to check your statement, but of course you can also contact your credit card company.
One way you can pay off your debt is to give top priority to the credit cards with the highest interest rates and transfer the entire balance of these cards to a 0% APR card. If you are unable to transfer the balances from all of your credit cards to a 0% APR, you should transfer the balances from the highest interest credit card first. Check out our Debt Consolidation Calculator to estimate how much you can save. Before completing a balance transfer, you should also be mindful of when the introductory APR ends and work towards paying down the debt while that introductory rate is in effect.
Build an Emergency Fund
A surprise car repair or medical bill can totally derail the most well-intentioned debt repayment plan. Preventing additional debt is a really important part of an effective debt elimination plan. If you are able to consolidate your debt at a lower rate using a balance transfer, try to commit to saving for an emergency fund if possible. Of course, creating an emergency fund shouldn’t necessarily be prioritized over paying off your debt after the introductory balance transfer APR expires, but it might be possible to start saving small amounts for emergencies while the introductory rate is in place.
This fund can help ensure you have money available for unplanned life events that can hurt your debt repayment plan. Make sure you keep this emergency fund separate from all other finances and use it only for unexpected expenses.
Develop a Payment Schedule
Create a clear monthly budget and debt payment schedule. By using different online budgeting tools and apps, you can get a realistic picture of necessary monthly expenses to help determine the maximum amount you can allocate towards aggressively paying down debt.
Remember, the 0% APR is only for balance transfers. New purchases would be subject to the standard interest rate of the credit card and would ultimately add to your existing debt. To ensure you do not acquire additional debt, it’s a good idea to avoid purchases while paying off balances. One tactic is to take them out of your wallet and stash them in a drawer so you aren’t tempted to use them on the fly. Don’t simply cancel your cards as this can lower your credit to debt ratio and make future financial needs such as getting a car loan or refinancing your home more challenging.
Consistency is king in paying off credit card balances. Once you decide on your monthly payment, commit to this being a non-negotiable monthly expense. You can also speed the process up by putting any extra funds, such as work bonuses or tax returns, toward the debt as well.