You already know about my 14-year debt merry-go-round and plan to end it in 24-months. Since this feat will put a serious cramp in my spending style, I don’t want to pay a penny more than I need to in interest costs (who does?). Enter heaven-sent low-interest balance transfers.
What is it? A low-interest balance transfer allows you to transfer higher interest debt to a credit card that’s offering a lower interest rate, typically between 0%-2.99% AIR (Annual Interest Rate) for a limited amount of time, usually between 6-12 months.
Why use a low-interest balance transfer? You save on interest costs! A balance transfer of $5000 from the average credit card can save almost $1100 in interest /year. Because the offer is time-limited, it’s also great motivation to get serious about your debt: pay it off before the interest-free period runs out.
How: Apply for a credit card that is offering a low-interest balance transfer. There are a ton out there, so it’s best to research them. I picked a card that offered a combination of low AIR (0.99%), over a long period of time (1-year) with a low balance transfer fee (2% of the amount being transferred). The tricky part is that you will likely need a decent credit score to qualify for the card.
My case as an example: I have a current consumer debt-load of about $35,000. I have a line of credit that charges 9.47% interest and 3 credit cards that vary between 19.99% and 21.99% interest. Assuming I maxed out my LOC and left the remaining balance on the higher-interest credit cards, I should be paying about $5000/year in interest. That’s $420/month. That’s insane. I know people are living this reality (or worse) everyday, and I can only imagine how crushing it feels to be making massive payments only to see the principal budge a tiny bit.
I have 2 cards which offer 0.99% AIR on balance transfers for a one year period. Because I already told you that past-me never said no to a credit limit increase 🤦, the limits on these cards are quite high. This means that I currently have almost all of my debt sitting on credit cards that charge me 0.99% AIR. A quick calculation shows that I will be paying closer to $700 in interest this year: a savings of $4300 in interest costs. This will go a looooong way to helping me hit my debt repayment goals.
Now, I am (obviously) not a financial guru, so you shouldn’t take anything I say as advice. That said, if you are tempted to take advantage of a balance transfer yourself, please be aware of the many pitfalls:
- Most require you to pay a ‘balance transfer fee’, usually 1 or 2% of the amount being transferred. This means you need to do the math to determine if the transfer is worth it. For example, if you have $500 sitting on a credit card at 21.99% interest, that $500 is costing you about $9/month. A balance transfer with a 2% fee will cost you $10. If you were planning to pay off that $500 over 2 or 3-months, a balance transfer really wouldn’t be worth your time or money.
- If you are late with a payment, even by one day, the low-interest period will end immediately. This means your interest could skyrocket from less than 1% to 21%+ overnight.
- The temptation of cheap credit might make you complacent about your debt, and easier for you to stay in the red. For Pete’s sake, if you decide to take advantage of a balance transfer offer, do it with a solid plan to pay off the debt ASAP. Don’t get stuck in a balance-transfer cycle like some people I know…ahem 😬.
Long story short: if you trust yourself to be responsible with a balance transfer, go ahead and do it. But if you have a tendency to treat credit cards like free money, tread carefully!
’til next time!