A Balance Transfer Can Be A Useful Tool For Getting Out Of Debt

A promotional rate on a credit card is appealing to anyone. But if you’re trying to pay off debt, benefiting from no interest for 12 to 18 months can give you time to get your financial house in order.

Credit card debt is at an all-time high and rising. Americans collectively owe $1 trillion on credit cards. That’s a big problem, and it goes beyond finances. Too much debt can take a serious toll on a person, sometimes resulting in long-term health consequences. 

It’s easy to accumulate debt, but figuring out how to manage it can be daunting. One solution for those who want breathing space is a balance transfer — taking out a new credit card with no interest for a limited time and transferring existing debt onto it. 

Say you owe $10,000 on a credit card with an annual percentage rate (APR) of 20%. You get an offer for a new card with 0% interest for 12 months. You might have to pay a fee of 3% or so to transfer the debt, but that fee pays for itself over time. 

Here’s the breakdown: It’s a $300 fee for that $10,000 transfer. Alternatively, if you keep your balance on your current card with a 20% APR, you’d be paying roughly $2,000 in interest alone in a given year. So, using a balance transfer could save you about $1,700 in your first 12 months.

Saving money is the most important reason to consider a balance transfer. The pause on interest gives you the opportunity to lower your monthly payments while reducing debt. 

A balance transfer also provides flexibility in how you manage your finances. That freedom of having an extra $100 or $200 in your budget each month gives you more options. It alleviates that “stuck” feeling of not having enough money to make financial choices. 

Your credit score could improve while you’re making payments. There are many factors that go into a credit score, but paying your bills on time is one of the most important. And if you’re using the money you’re not spending on interest to reduce your debt, that also helps to boost your credit score. 

A balance transfer can be a powerful financing tool. But it’s not for everyone. There are some things to be aware of before transferring debt.

First, you should aim to pay off the transferred balance during the grace period. Figure out how much you’ll need to pay each month to do that. Many people get into trouble when they start making smaller payments and use the excess cash to build up more debt. 

It’s also important that you pay the bill on time. In some cases, you could lose that introductory rate if you pay late. 

To take advantage of a balance transfer, you have to qualify for a sufficient line of credit. You also need to be sure you’re in a position to pay off your debt, not add to it. 

The card associated with your balance transfer should ideally be used only for paying down debt. If you start making purchases or taking cash advances on the card, you could end up deeper in debt. Some cards offer 0% on all transactions made during the promotional period, while others offer that rate only on transfers. 

Cash advances generally aren’t a good idea. They come with interest and fees, and interest starts accruing immediately. If you’re going to take cash out on a card, make sure that’s the only option you have, because it’s expensive. 

It’s worth doing the math to figure out if a balance transfer is a prudent option. Your current bank is a good place to start. It might be willing to offer you a promotional rate. If not, shop around.

Financial institutions have online tools to help you understand balance transfers and other products. Balance transfers are an increasingly popular way of reducing debt, and more banks are offering cards with promotional rates in response to that growing demand. Many also offer tools that can help manage debt and improve credit scores. 

Everyone has a different way of managing finances. For many, it can be confusing. We’re not taught finance in school. Getting it mostly right pays off over time. And a balance transfer can provide the breathing room to figure it all out.

Christopher Fred is executive vice president and head of U.S. credit cards at TD Bank.