How exactly was I able to pay off $5,000 in credit card debt in 6 months? I’ve already discussed how I set my priorities and made dramatic cuts in my spending, as well as my anti-budget hacks to make and meet goals. My last trick? I used a balance transfer card to stop paying interest on my debt.
Zero Interest. None.
Not shelling out hundreds of dollars a month in interest certainly makes your money stretch! Each payment suddenly becomes that much more powerful, reducing your principal more quickly. This way you’re actually making progress instead of treading water.
My decision to balance transfer
I didn’t take the decision to open another credit card lightly. I had just dug myself into consumer debt, I didn’t need even more balance available! I worried I’d just spend on that card as well. Anyway, what was the game here? Why would a credit card company just eliminate my interest like that?
So I dug in. I read up on my options. I called a trusted friend, who has much more financial savvy, to float the idea and get some feedback.
How balance transfer works
In my situation, balance transfer worked like this:
- You’ve run up a balance on some normal credit card with normal credit card interest rates. (Mine was charging me at 20.24%. Yikes!)
- You recognize the problem and open up NEW card to transfer the balance to. Hopefully the whole balance if the credit limit allows it. You chose this particular new card because the terms are favorable to paying down debt, otherwise known as balance transfer cards.
- You stop spending money! (This is a good step to implement at any time!)
- You make sure any debt on the old card (the one still charging you interest) is paid.
- You pay down the balance on the new card. You pay it down ASAP, because that beautiful 0% interest rate won’t last forever! Each payment packs a bigger punch because it’s all going to principal.
Factors to consider
Balance transfer cards all come with different terms. Here are some factors to pay attention to.
What does my introductory interest rate apply to? Most of these cards have interest rates specific to each category. It’s common to see one interest rate for purchases and another rate for balance transfers. Of course, if you’re trying to get out of credit card debt it’s helpful to stop making purchases. Still, good to know what you’re getting into.
How long does my introductory rate last? These cards only give you that beautiful rate for a short time. I’ve seen introductory rates as short as 12 months and as long as 21 months. The goal is to pay down your debt before the introductory rate ends, otherwise you’re back to paying interest on your debt.
Do I need to pay any fees? The two main fees I was looking out for as I researched cards were annual fees and balance transfer fees. Annual fees are pretty self-explanatory and to be avoided when possible. The balance transfer fees I’ve seen range from 0%-5% of the amount transferred.
Am I likely to be approved for this card with my current credit? Obviously there’s no guarantee that you’ll be approved for any particular card. However by doing your research you can see what credit ratings each card generally accepts. If your credit has taken a hit, try to find something that’s a good fit for your current situation. It’s not going to help your frame of mind or your credit to apply to cards you’re unlikely to be approved for.
So how do I actually decide which balance transfer card to use?
I went looking for a sweet spot between these different factors. I chose a card (Chase Slate) that had a slightly shorter introductory time frame, I believe it was 15 months at the time. I liked it because it had no annual fees, and best yet no balance transfer fee. That meant I could move my money over completely free of charge and start paying it down ASAP.
I was fairly certain I could pay my credit card debt off completely in that 15 months, but not 100% certain. So I had a back up plan.
I figured if I had to pay a balance transfer fee at some point it should be as little as possible. So I opened a card with no fee first, figuring I’ll pay as much as I can down in the 15 months. If I still had a balance, and was faced with paying interest again, my plan was to open an new card. Even if I chose a card with a BT fee this time, at least that fee would be way smaller, because my balance would be way smaller.
One factor I really didn’t put a lot of stock in was card rewards. For some people that might be a consideration, but for me? I was laser focused on my goal. Rewards benefits could wait until I proved myself a responsible credit manager.
It’s been over a year of paying off my credit cards IN FULL, EVERY SINGLE MONTH. I’m just now starting to dabble in the world of credit card rewards. I don’t consider that wasted time. I needed to prove to myself that I’ve learned some discipline. I just signed up for my first travel-rewards card last week. Even now, I do that very warily, watching myself for any signs of recurring bad habits.
Speaking of bad habits…
My debt pay-off stumbles
My card offered 0% APR on purchases for the entire first 15 months. I had hoped I wouldn’t be making use of that. Turns out that perk was really helpful. Like I said earlier, putting more purchases on your credit card as your trying to pay it down is not going to help your process along at all. But we’re all human.
It took me several months to get into a rhythm where I stopped overextending myself. At first I overestimated what I could spare each month. I’d make a big payment toward the card but then run out of money at the end of the pay period and end up throwing purchases on there to get by. It was incredibly frustrating. It was during this time that I perfected my pay-day hacks. As I became better acquainted with my own habits I was able to make more accurate plans. After a few months I was making payments and NOT undermining them with further purchases.
How to lose the balance transfer game
Balance transfer cards can be an incredible tool to pay down debt and get your feet under you financially. But remember how I asked why the credit card companies would ever give up that interest income? There’s one really obvious way the banks win in this scenario…
If you don’t pay down your debt.
Say I had transferred my credit card debt to a new card, but failed to actually pay down the balance. Eventually the new cards introductory rates would have ended. I would have gone back to paying standard credit card interest rates on my balance, it would just be a different company making money off my debt.
Worse yet, say I had used the opportunity of having nearly double the available credit to run up an even higher tab! I would have been left with even more debt. No bueno.
If you’re in a place to be able to successfully apply for a card, and make some real progress paying down your balance, a balance transfer card may be a great option for you. It can buy you interest-free time and help your dollars stretch. Just don’t forget you’re playing a serious game. Don’t let a balance transfer card be just another place to increase your burden.
This tool will serve you best once you’re in a situation where you can make changes to your spending. Easier said than done. For me, my spending at the time was discretionary. Some people end up in debt as a consequence of illness or injury or other difficult circumstances. It may not be as simple as cutting out the cocktails and lattes.
I hope that, regardless of how you got to where you are, you’re now able to navigate these waters with a bit more direction and confidence.
For another great resource on finances in general, and balance transfer cards in particular, check out NerdWallet. They’re a treasure trove of information and tools. Here are a few links:
For more background:
NerdWallet’s What is a Balance Transfer, and Should I Do One?
For card comparison:
NerdWallet’s Best Balance Transfer Cards of 2018
For a calculator to see how fast you can make your debt disappear:
NerdWallet’s “When Will I Be Debt Free?” Calculator
I cannot recommend highly enough using that calculator. You can play around with factors like your interest rate and monthly payments to see what the outcome will be if you make some of these changes.. It was a calculator just like this one that inspired me to take the leap into debt pay-off mode. Don’t be surprised if you see a whole post written about it before long…
Until then, happy researching!
Have you already used a balance transfer card? What was your experience?
We’d love to hear about it!