Credit Karma Tidbit #5: Tackling Credit Card Debt with Balance Transfers
Credit card debt. Most of us have it. 92%, according to Credit Karma data. And it’s not just on one credit card. We’re hacking away at an average of about $6,500 in debt across six different credit cards. The good news is that there are lots of ways to work on paying off that debt. Most people choose to pay each bill separately and try to manage them all at once. But juggling several credit card payments with different interest rates can be overwhelming, and often times you won’t know where to start or which card to pay off first . But there’s another way. And it’s called a balance transfer card. What’s this balance transfer business? A balance transfer card allows you to consolidate your credit card debt from several cards on to one. From there, you’ll make one monthly payment, usually at a lower interest rate, instead of multiple credit card payments per month.
The best balance transfer cards are typically available to those with good to excellent credit ratings and have an introductory 0% APR on balance transfers and purchases for six to 18 months. So when you open a new card, you’ll have a while to work on paying off that debt interest-free.
However, you will pay an initial cost for the balance transfer. Most cards have a 3 to 5% balance transfer fee. So make sure you shop around for the lowest balance transfer fee.
Tip: Don’t let the 0% APR on purchases on your new card tempt you to spend. You should focus your efforts on paying down your debt, not accruing more.
Additionally, the new credit limit will add to your overall available credit, lowering your credit utilization rate. This is a rate calculated by taking your total available credit and dividing it by the amount of credit card debt that you owe. It’s best to keep it low, under 30%, so that lenders will see you use credit responsibly. If you’ve struggled to keep it under 30% in the past, a new balance transfer card will help decrease it.
But I thought opening a new credit card was bad for your credit score? It’s true that opening a new credit card will initiate a hard credit inquiry, which will ding your score a few points. But the benefits of opening a balance transfer card could far outweigh the few points lost.
Tip: Don’t apply for several credit cards at once. While one hard inquiry won’t do severe damage to your credit score, multiple inquiries will, and will show lenders that you’re credit-hungry. They might flag you as high-risk.
What are some good balance transfer cards? Capital One Platinum Prestige Credit Card: This card has one of the best balance transfer offers out there with 0% APR until August 2012 on balance transfers and purchases and no annual fee. When that introductory period ends, your interest rate will be lower than the norm, at 10.9%. You’ll need excellent credit to get approved for this card, so it’s not for you if your credit score’s not great.
Citi Platinum Select MasterCard: With a 0% APR on both balance transfers and purchases for 21 months, this card is a better choice for those whose credit is less than perfect, but still fair. Once the introductory period ends, your APR will jump to somewhere between 11.99% and 20.99%, depending on your credit, so be sure to pay off most—if not all—of your balance before then. This card has a cash rewards program, but don’t let that sway you from your goal of paying off that debt.
Bottom Line: A balance transfer card isn’t right for everyone, but might be right for you if you’re struggling with paying multiple credit card bills each month. If you’re thinking about applying for a balance transfer card, do your research to find which one would work best for you.
Credit Karma™ is a completely free credit management service that provides free credit scores, personalized savings recommendations, and financial education. We believe free access to one's credit score is a fundamental consumer right. Credit Karma helps more than 2.6 million consumers realize the everyday cost savings of having a good credit score. Visit us at www.creditkarma.com.