Suffering from Holiday Debt Hangover? Consider Consolidating Your Credit Card Debt into a Balance Transfer Card
So maybe you spent more than anticipated over the holidays. We get it. Although there are many knowns we should be prepared for—taxes, daylight saving, bad things happening in clusters of threes—holiday spending has a special way of creeping up on us. No joke: In 2017, 44 percent of American shoppers put more than $1,000 on their credit card debt from holiday spending, and 5 percent racked up over $5,000.
Or maybe you’re like me, and had a spend-happy month in December, thanks to milestone birthdays of loved ones and larger-than-usual business expenses. If you went a little overboard and had to resort to dipping into your credit card, you may want to consider transferring your debt to a balance transfer card.
Not sure whether it’s the right choice for you? Here’s what you should consider:
Understand How Balance Transfer Credit Cards Work
In a nutshell, here’s how it works: you transfer balances from your existing credit cards to a balance transfer card. Why go through the trouble? Ideally, the card has a 0 percent introductory rate, which can last anywhere from six to 21 billing cycles. So when you transfer your balances from your credit cards to the new balance transfer one, you get to take advantage of a limited period of time where you are accruing no interest.
The benefits of doing this are twofold, explains consumer credit card expert Kimberly Rotter. First, since all of your payments will go completely toward the principal balance and not interest charges, you could pay off your balance much faster. Second, a 0 percent interest offer could allow you to park a balance and avoid hefty interest charges while you focus on paying down a higher-interest debt first. As you can see, you’ll not only save money on interest fees, you’ll have an easier time managing your debt repayment plan.
Balance transfers might come with fees tacked on. While the amount varies per card, it’s typically anywhere from 2 to 5 percent of the transfer. “A balance transfer fee eats into your potential savings, but it’s usually equal to no more than two to three months’ interest, so you could still save money even if you have to pay a fee,” says Rotter.
So before you opt to do a balance transfer, you’ll want to do some math to make sure the fee is worth it. This is particularly key if you’re transferring to a card you intend to use after the promo rate ends (more on that in just a bit).
Besides the fees tacked on to a balance transfer, you’ll also want to look at fees, terms, and conditions of the new card. There’s something called a Schumer box, which is a handy, easy-to-read table that includes the costs involved with a particular credit card. You should be able to look over terms and conditions for any credit card by doing a quick Google search.
Strategize Your Balance Transfer
So let’s say you don’t qualify for a balance transfer card with a 0 percent APR, but the balance on the transfer card you’re eligible for has a lower APR than your existing cards. You’ll want to deliberate on this for a bit.
When the offer is for a reduced interest rate but higher than zero, plus you have to pay a fee for the transfer, the actual savings are a bit murkier, points out Rotter. “You’d need to play around with a payoff calculator to make sure it’s a good move,” says Rotter. “And don’t pay a fee to transfer a balance unless the financial benefit is really clear.”
Another conundrum you might face: If the limit on your card is lower than the total amount you want to transfer, you’ll need to carefully choose which balances you want to kick over to your new card. So let’s say the limit is $4,000, and you have $6,000 total on your high-interest cards. In that case, you’ll save the most by transferring over balances on the cards with the highest APR. Most balance transfer cards allow you to transfer balances from two to five cards, so you’ll need to be judicious.
Figure Out If You’ll Keep the Card
On the glorious day when you’ve paid off the balance, will you want to keep the balance transfer card open? Know that closing your card may negatively impact your credit score. If you decide to hold on to the card, gauge whether the standard APR stacks up against the cards you already have.
If the balance transfer card is higher than your other cards, and you decide to keep it open, you may want to pay off that card in full each month. If you have to carry a balance for more than a month, it might not be worth it.
Think About How It Affects Your Credit Score
Maxing out any card can hurt your score. For starters, if you decide to close out your card after you’re done paying off your balance, it could ding your credit. And if you take full advantage of a balance transfer offer by maxing out your card, your score might take a dip, explains Rotter. In turn, it could make it hard for you to qualify for new credit while you build your score back up. “If maxing out the balance transfer is part of a good money-saving payoff strategy, it might be worth it,” says Rotter. “Just be sure you understand how your credit score will reflect your decisions.”
Have a Repayment Plan
As you might expect, not having a repayment plan in place or neglecting to stick to it could prove costly. If you don’t pay off your balance before the 0 percent introductory period ends, you’re stuck with paying off a card with an APR which could potentially be higher than your old ones. And, combined with the transfer fee, it could end up costing you more.
So before you jump in and sign up for a balance transfer card, get real. Make sure you can reasonably pay off the amount you transfer before the standard APR kicks in. You also don’t want any added pressure. If repaying the balance on the balance transfer card before the intro rate ends isn’t feasible, you might not want to nix the option entirely. Consider transferring a lower amount that you know you can pay off in say, six months or a year. It’s far better than biting off more than you can chew and potentially paying a pretty price for it later.
Don’t Rack Up New Debt
If you’ve done the necessary homework and decide that a balance transfer card makes financial sense, don’t rack up new credit card debt. If there’s a chance you’ll run up the balance on the original card, don’t sign up for a balance transfer credit card, recommends Rotter. “The road to crushing debt is often paved with good intentions,” says Rotter. “If you think this will happen, or if you see it happening, give yourself some tough love, and close out your old cards.”
Close the accounts to prevent new charges. Sure, closing accounts may lower your credit score because you’ve lowered the average age of your accounts, points out Rotter, but it might be better to do that than go into deeper debt. Another option is to temporarily freeze your credit card, which is offered by some credit card networks. (Note, this is different than freezing your credit.) While the primary intent is fraud protection, to avoid credit card spending, try freezing your card temporarily via your app.
Depending on your situation and the type of offers you receive, transferring holiday debt to a balance transfer card could help your finances. But like all things in the way of personal finances, there’s certainly no one-size-fits-all answer. You’ll want to delve into the details and assess based on your circumstances.