Credit Card Debt Consolidation
If you’re tired of juggling multiple credit card payments and want a simpler way to pay down debt and get your finances back on track, credit card consolidation may be the solution. A balance transfer is one of the most common types of credit card consolidation. It works by transferring your existing credit card balances to a new credit card, so you only need to make one payment each month on one credit card.
Potential Benefits of Consolidating Credit Card Debt with a Balance Transfer
There are many benefits to consolidating credit card debt with a balance transfer, including but not limited to:
- You may get a reduced APR. High interest rates on credit cards add to your debt and can make it difficult to put a dent in the outstanding balance. When you complete a balance transfer on a new card, you typically receive an introductory interest rate, which is often lower than what you’re paying on your existing cards. It may even be interest-free. If the interest rate on a balance transfer is higher than what you’re already paying, then it probably isn’t a prudent move to make the transfer
- It cuts down on the number of credit card payments you make each month. When you transfer your balances to one card, you make a single monthly payment instead of making multiple payments to different credit card companies. Having to make only one payment reduces the chances of forgetting a payment or making a payment late, which could improve your credit score, given that payment history is the most important factor in determining credit score.
- You may be able to pay off your debt more quickly. If you get a lower introductory interest rate and your balance accrues less interest than it would on your existing credit cards, you’ll owe less and may be able to pay off your debt faster.
- Your credit score could increase. Along with potentially minimizing any missed or late payments, a balance transfer could also boost your credit score by lowering your credit utilization ratio, an important equation used in determining credit scores. If the transfer allows you to pay off more of your outstanding credit card debt, this could lower your credit utilization ratio, which may raise your credit score.
Potential Downsides of a Balance Transfer
Here are a few things to consider before going through with a balance transfer:
- It may generate a hard credit inquiry. When you apply for a new credit card, the card issuer typically reviews your credit report as part of the application process. This produces a hard inquiry to your credit reports, which may reduce your credit score. The good news is that a hard inquiry typically only lowers a credit score by 10 or less points.
- You might be charged a fee. Some credit cards will transfer balances at no charge, but others charge a balance transfer fee, which typically ranges from 3%-5% of the amount you transfer and gets added to the balance that you owe.
- Introductory periods have expiration dates. If you haven’t paid off your balance by the time the balance transfer’s introductory period expires, the amount that’s left will accrue interest at a higher interest rate. Also, the credit card company may cancel the introductory offer—and your account may begin accruing interest at a higher interest rate—if you make a late payment at any point before the offer expires. This is known as a penalty APR.
- A balance transfer could raise your credit utilization ratio. Depending on how you handle it, a balance transfer could raise or lower your credit utilization ratio. If you open a new credit card, and it has a high balance from the balance transfers, the credit utilization rate on that card could be above the 30% level many experts recommend you stay below and lower your credit score. However, if you don’t close the credit card accounts from which you transfer the balances, their credit utilization rates should drop, potentially lowering your overall credit utilization ratio.
- Payments may not be applied to the balance you transfer. If you pay more than the minimum due each month, your credit card company must apply the extra funds to the balance with the highest interest rate. So, if you have charges on the credit card you transferred balances to that have a higher interest rate than the balances you transferred, that extra money will be applied to those charges. To pay down your debt as quickly as possible, avoid using your balance transfer card to buy anything else until you’ve paid off the amount you transferred.
How to Do a Balance Transfer
Consolidating credit card debt with a balance transfer is a relatively simple process that can be completed in a few easy steps.
1. Research various credit cards and balance transfer offers to find one for which you’ll qualify. Try to find one with the lowest introductory interest rate, a long introductory offer period, and low or no fees. Once you’ve identified a card that works for you, apply just like you would for any other credit card or accept the pre-approved offer you’ve received.
2. Once you’re approved, contact your new credit card company and ask to have the credit card balances you wish to transfer transferred to your new card. Depending on the credit card company, the transfer may also be made with provided balance-transfer checks.
3. When the balances transfer to your new card, make your monthly payments on time, every time to reduce your debt. Be sure to make more than the minimum payment due to reduce your debt quicker.
Is Credit Card Consolidation Through a Balance Transfer Right for You?
Consolidating the balances on your credit cards may seem like an obvious choice if you’re serious about becoming debt-free. But there are a few things to consider before making a decision, including:
- Your Credit History
- To do a balance transfer, you must be approved. And, if you don’t have good credit, you may have trouble getting a new credit card. If you do qualify, it’s important to compare the new rate with what you’re currently paying. If you can’t get a better rate than what you’re already paying, consolidating probably doesn’t make sense. And, if what you will save in interest by consolidating is negated by any fees you’ll pay, again, it probably doesn’t make sense.
- Your Budget
- To get the most out of a balance transfer, it’s best to pay off the amount you transfer before the introductory period expires to minimize the amount of interest you’ll pay. If you don’t have enough room in your budget to pay off your balance before the introductory period ends, or you don’t have enough funds to make regular payments and you miss one or make one late, be prepared for higher interest charges to begin accruing on the remaining balance.
- Your Spending Habits
- Consolidating credit card debt with a balance transfer won’t provide lasting results unless you’re willing to change the practices that got you into debt in the first place. If you don’t have a plan to reduce your expenses, boost your income, or do both, you’re likely to end up right back where you started.
Consolidating credit card debt with a balance transfer can be a good way to streamline your monthly payments, reduce the amount of interest you pay, and help you get out of debt faster. But it’s not the right move for everyone in debt. It’s crucial to first consider your credit history, review your budget, and compare the interest rates and terms you qualify for on any new credit card to what you already have. By taking the time to first do a little homework, you should be able to identify whether a balance transfer is a fiscally sound move for you.