When you are trying to get out of debt, one of the ways to get there faster and cheaper is to lower your debt interest rate (APR).
But if you are like me, you have followed what the gurus said: called the bank, begged, reasoned and threaten them to leave for the competitor and alas, they still wouldn’t budge.
They think they have you over a barrell and can get big bucks out of you, so they don’t care that you are trying to get your financial house in order.
It sucks but don’t give up just yet, you have options.
Every few weeks you get them in the mail, usually, from credit cards you already own but once in a while, it’s a new card offering you a 0% balance transfer off or a 4.99% promotional interest rate.
And while some folks think that they are the devil, I believe – when used correctly – 0% and lower rate promotional balance transfers can be a financially savvy tool for getting out of debt fast and cheaper.
But not every offer is a good one. So you need some guidelines to determine if it’s worth your attention.
You have to take a good look at the details and see if it matches with your plans
- The offer should be for at least 12 months; 18-24 months is preferred.
Anything offering less than a year isn’t really worth the transfer fee unless the regular rate will be significantly lower than your old card. Think 4.99% as opposed to 27.99%. If not, shred it.
- Any transfer fee under 3% is golden.
Usually, transfer offers come with a 3% transfer fee which is acceptable, but if you can get it waived that’s preferred. Because for every $1000 you transfer you will pay $30 for the service. I know… no one wants to pay a fee but a 3% fee can be better than paying a 27.99% APR for a year am I right?
- Evaluate the regular APR.
While the intro offer might be great, if you know you won’t be able to pay off the balance before the end of the period, then you need to ensure that the APR will – at the very least – be lower than your old card.
- If it’s a new card, look out for annual fees.
With all the options for credit cards on the market these days there are very few instances where a card with an annual fee is a good idea. If the benefits don’t far overshadow the fee every year, then keep looking.
Bonus: Try to pick a card with good benefits, ones that you will actually use – miles, cash back, with a company you regularly shop at etc. You don’t want to be a serial open and closer.
The idea is to use the 0% balance transfer to allow you time pay off the entire balance interest-free. If you can’t pay the full balance, then get as far as you can since you will still save on interest payments in the end.
Once you’ve got an offer that lines up with your goals here are the secret tips to using the 0% balance transfer the right way:
Plan to pay off the balance by the end of the introductory period (if you can)
This means you will want to have your monthly payment be more than the minimum payment. If possible you want it to be the following formula.(transfer balance + transfer fee)/# months in intro period
For example, your transfer balance is $5,000, and the transfer terms are a transfer fee of 3% to get 0% for 12 months. Your monthly payment will be (5000+150)/12 = $429.16 per month in order to pay off by the end of the period.
If that’s not possible, then pick a number you can afford and pay that, but watch the new APR.
Know the deadline for the balance transfer.
If you get the offer in the mail and you plan on using it, either use it right away or set a reminder on your phone to take advantage of it at least 1 week before expiration.
The point is to take advantage of the offer so make sure you don’t miss the deal cause you forgot to apply. While they come around fairly often you never know when they might stop offering, so pussyfooting around mind not be wise.
While you are waiting for your balance transfer to complete continue making the payments on your old card.
A transfer can take several days to a few weeks to be completed on both sides. Always check the new card to see if the new balance has been completed, AND check your old card to make sure that the balance is zero.
If you stop making payments on the old card and the transfer hasn’t been completed, then you could get hit with late fees or get your credit damaged if reported.
Make at least the minimum payment (ideally more than the minimum) during the introductory period.
A 0% introductory rate does not mean a get out of jail free card.
There is still a minimum payment that has to be paid, and usually missing a payment not only results in a fee but also results in a loss of the introductory rate. Some banks still offer the 29.99% penalty rate for late payment.
And believe me, even years later with improved credit some companies won’t lower your rate. I’ve closed an account because the bank wouldn’t budge. So pay the minimum and at least on time.
Make the payment date the same as your old card
This piggy backs from secret number 3. If you make the payment date the same as your old card or your other cards, then you won’t have to remember an additional date.
That makes you less likely to miss a payment… are you picking up what I’m putting down?
Automate, automate, automate!
I’ve said it before and I’ll say it again. Once you have determined your payment amount, you should automate your payments.
That way it isn’t left up to your memory to make the payment and you will be less likely to miss a bill. Automating also allows your debt payment plan to run in the background so you don’t have to meditate on it daily.
One month after the transfer check your old cards again for a zero balance
Your credit card company adds interest based on your cycle date.
If your balance transfer completes in the middle of your cycle, then you would still be charged for the prorated interest accrued that cycle.
That means, even though your balance was completely paid off at the time the transfer completed, you could still have a balance on the old card on the next due date. Checking your old card one month after the transfer can ensure any interest charges are paid after the transfer.
Know when your introductory rate ends.
You need to have the introductory rate end date stowed away in your long term memory.
If you know you’ll forget, then put it in your calendar on your phone, or wherever you can keep track. It’ll also be on your credit card statement every month when your rate ends.
You can roll, but tread carefully
At end of the introductory period, you can make the decision to roll again into another intro offer. But this is a slope you should tread into very carefully.
If you are still committed to your plan of debt repayment, didn’t acquire new debt and just needed more time to get the job done on clearing the balance then another transfer can be a good idea. But as before the offer has to line up correctly and should not be from another card.
You don’t want to constantly be opening new cards every year just for the intro rates.
Don’t make new purchases with your transfer card or your old card!
Now is not the time to rack up new debt. Stay the course. Do not get excited at the presence of a 0 balance and go buck wild in the mall. It is not a license to spend on your old card, and certainly doesn’t mean that you don’t have to make any payments for the length of the intro fee!
Instead be happy that you are making strides to getting your debt down and partake in a small celebratory beverage or meal (paid with cash of course).
So what next?
Like any good tool if used incorrectly you can cause yourself harm.
But you now have the knowledge on how to use them accurately.
And if you follow these 10 secrets to balance transfer success, then you can use balance transfers as a resource to financial success.
You can do this.
You can get to financial success faster and cheaper than before!