How a Credit Card Could Help Lower the Cost of Debt
If you think all credit cards are the same and any one will do, think again.
Choosing the right credit card to match your financial situation and spending habits can bring benefits that go beyond convenience and rewards, it can also help lower the cost of most types of debt.
A recent CardHub.com study revealed that roughly 73% of major credit card issuers enable you to shift over an auto loan balance, and 64% also allow transfers from mortgages, small business loans, student loans, home equity lines of credit and payday loans. Considering that you can turn whatever interest rate you’re currently paying into 0% for up to 18 months, that’s a rather intriguing proposition to say the least.
Here’s how a balance transfer works: the credit card issuer pays off what you owe with your original lender, becoming the holder of your debt in the process. You in turn can get a low interest introductory period – these days, typically 0% for more than a year– before higher regular rates kick in. Even when you factor in the standard fee for this sort of transaction – 3% of whatever you transfer – the savings can be significant.
Just compare the costs you’d incur with each major issuer’s best balance transfer offer (see the chart below) to what you’d pay under the terms of your current loan or credit account.
There are advantages other than savings with a balance transfer, especially if you’re able to leverage the underrated ability to transfer auto loan debt. An auto loan balance transfer also triggers the transfer of your title, which in turn eliminates the threat of repossession.
However, if you will not be able to pay off the loan before the interest rate increase, it might not make sense to make the switch. It’s also important to make sure the interest rate will indeed be lower than what you are currently paying because not everyone will qualify for 0% interest. Also be sure to check to make sure there is no extra fee associated with making a transfer and that carrying this much debt on a card will not hurt your credit score.
With that said, here are a few simple steps you can take to make the most out of any balance transfer:
- Maximize Your Credit Score. The longest 0% interest introductory terms are given to people with excellent credit, so if you qualify for this rate, your are effectively buying yourself extra time to pay off the debt. The best way to build credit is to make on-time credit card payments each month while minimizing your credit utilization. It’s a process for sure, but don’t worry if you don’t have upper-echelon credit quite yet--0% offers don’t appear to be going anywhere.
- Make a Realistic Plan: The key to a successful transfer is to pay off your balance within the low-interest introductory period or shortly thereafter. It therefore makes sense to figure out whether or not that’s feasible before actually beginning the process. Crunch the numbers and determine how much you can afford to attribute to debt payments each month.
- Use a Credit Card Calculator. The ultimate cost of a balance transfer depends on a number of different factors, including the length of your card’s 0% intro term, a balance transfer fee and its regular rates – not to mention the amount of your balance as each month passes by. A credit card calculator can therefore simplify the process of evaluating the potential cost and savings associated with a balance transfer. You can input your balance and either a given monthly payment or your timetable for debt freedom to see what kind of fees and finance charges you’re looking at.
At the end of the day, balance transfers aren’t for everyone. But given how much debt the average person is currently trapped under, a lengthy 0% term could sure go a long way.
Odysseas Papadimitriou is CEO of Card Hub, a leading website that conducts personal finance industry research and helps consumers find the most valuable credit cards for their needs.