The post-holiday blues have set in along with hefty yuletide credit card debt. Your well-intentioned plans for a Christmas-within-your-means fell short, and now you're faced with the prospect of paying off your holiday spending -- plus 15 interest -- for the next six months or longer.
There might be a better way.
A credit card offer that features a low- or no-interest introductory period on debt transferred from another credit card can be an efficient way to vanquish a large credit card balance over time without shelling out any (or very little) interest.
"You have to do a balance transfer for the right reasons," says John Ulzheimer, president of consumer education at SmartCredit.com. "To do it to tread water for another 12 months before sinking is not worth it. To tread water while aggressively paying down your debt in 12 months -- that's the right strategy."
Do the Math
Before jumping at an offer, read the fine print and calculate the costs. The key figures are the introductory interest rate, the length of the introductory period, the annual percentage rate -- or APR -- after the intro rate, the balance transfer fee, and the minimum monthly payment, says Mary Ellen Nicol, a counselor with nonprofit credit counseling service CredAbility in Atlanta.
Under a new federal law, the teaser rate must last at least six months. Many balance transfer cards will offer introductory rates for longer periods, anywhere from nine to 18 months, according to Ulzheimer. He recently received a zero percent offer for 21 months.
Be realistic in determining how long it will take to chip away at the balance. Will it take longer than the introductory period? If so, then the math gets a little more complicated. Now you need to consider what the interest rate will bump up to after the teaser period ends and how much you will pay in interest on the remaining balance.
Don't forget to add in the cost of the balance transfer fee, which is typically around 3 of the balance. Also factor in what the new card's minimum monthly payment will be, which often is a percentage of the balance transfer.
"If the fees are too high, the length of the low-interest rate period too short or the minimum payment too high for your budget, then it becomes not a smart financial move," says Nicol.
Can I Qualify?
Even if all the numbers pan out in favor of a balance transfer, you still have to qualify. That means you should have a good idea of what your credit looks like before applying.
"Simply because you want a balance transfer doesn't mean that you will get one," says Ulzheimer.
Those with stellar credit will likely qualify for the zero percent interest rate. Ulzheimer says that means a FICO credit score well into the 700s. If your credit score falls below that, you may get a higher teaser rate, but it still may be lower than what you're paying now.
The other factor is the credit limit. There's always a chance the new issuer won't dole out a large enough credit line for you to transfer your entire balance, says Linda Sherry, director of national priorities at watchdog group Consumer Action.
Check the fine print to see if there is a cap on the balance transfer amount. Otherwise, you may not find out if your new account will be able to swallow your balance until after the account is opened, Sherry says. Then you'll have two credit cards you need to pay off.
"Banks are not giving out high credit limits these days, so if you have a sizeable balance, the chance you'll be able to move it over in its entirety is pretty slim," she says, "unless you're an absolute stellar credit score."
Still, moving only a portion of high-interest debt to a low- or no-interest account could make it easier to pay off the debt without incurring a lot of interest, Nicol points out.
Living With a Transfer
You qualified for the balance transfer and moved your debt to a no-interest account. Now what?
Make sure the old card has been paid off by getting a statement from your old issuer. Sherry recommends keeping the old card open, charging very little each month (such as gas) and paying off the balance in full. That will help boost your credit score while you pay down your debt. If a balance still remains on the old card, continue to make payments on time.
Meanwhile, attack the balance transfer debt before the introductory period is up. And make sure every payment gets in on time. If you fall behind by 60 days, your low-or no-interest rate could disappear, says Nicol.
Last, realize that purchases on the new credit card may fall under a different APR than your balance transfer debt. If the rate is higher, avoid making purchases on the card because your payments will apply to the balance with the highest rate first. The point is to get out of debt, not dig a deeper hole.
"If you're getting into a balance transfer just to put off the inevitable and put on more debt, there will come the time to pay the piper," says Ulzheimer.