Report: More Americans Are Making This Savvy Credit Card Move
If you’re trying to pay down credit card debt, this could be your secret weapon.
Americans are currently struggling under the weight of $868 billion in credit card debt, according to the Federal Reserve Bank of New York, and delinquencies are rising. It is not easy to get out of credit card debt, but for some, balance transfers are one of the best tools available to do so.
An increasing number of Americans are taking advantage of balance transfers to pay down their debt. Consumers transferred over $54 billion to new cards in 2018, according to a recent Consumer Financial Protection Bureau (CFPB) report, up 38% since 2015. Here’s a closer look at how balance transfers work and why you might want to use one to pay down your debt.
How balance transfers work
A balance transfer is where you open a credit card with a new card issuer who agrees to accept your debt from another card issuer. The new card issuer will pay the old card issuer what you owe and it’ll add a small fee to your balance. Your new card typically has a 0% introductory APR for a certain number of months, during which you won't be charged interest on your balance. This is the time to put all of your extra cash toward your debt because it’ll minimize how much you pay overall. Once the introductory period is up, any remaining balance will begin to accrue interest at the card’s standard rate.
The average balance transfer amount varies according to cardholders’ creditworthiness, according to the CFPB report. Near prime cardholders (typically those with a credit score between 620 and 679) had an average balance transfer of about $2,845 in 2018, while those with prime credit (680 to 739) had an average of $4,136. On average, individuals with super prime credit (740 to 850) transferred $5,453. This difference partly reflects the larger credit limits available to those with better credit, enabling them to rack up larger amounts of debt.
Balance transfer costs
The typical balance transfer fee is a percentage of the balance you’re transferring. Average balance transfer fees have gone down over the past few years, according to the CFPB, falling from 3.2% in 2015 to 2.8% in 2018.
Your card issuer automatically adds this amount onto your transferred balance so your new balance will be slightly higher than your old one. However, if you’re able to pay off the full balance within the introductory period, you will still likely save yourself money. This is because the balance won’t accrue the interest it would have if you’d left it on your old card.
If you don’t believe you’re going to be able to pay back the full balance within the introductory period, be mindful of the card’s normal APR. This is the rate at which any remaining balance will accrue interest once the 0% APR period ends. If the normal APR is higher than what you were paying on your old card, your remaining balance will grow even faster. This might not be a smart bet in the long run.
Whenever possible, look for a balance transfer card that offers a similar or lower APR than the card you’re currently carrying a balance on. You can also try negotiating your new card’s APR with your card issuer, though the issuer is not under any obligation to change it.
There is another hidden cost of balance transfers that many don’t know about: the loss of the grace period. Your grace period is the period of time at the end of each billing cycle in which your card issuer won’t charge you any interest on your purchases if you pay your balance in full.
Many balance transfer credit cards eliminate the grace period on new purchases if you transfer a balance, so new purchases will begin to accrue interest immediately. This can put you right back into that debt spiral or even make things worse.
Read the cardholder agreement or ask your card issuer to see if it still offers a grace period on new purchases if you transfer a balance. If not, try to avoid charging new purchases to that card.
What to do if you can’t do a balance transfer
Approximately 97% of all balance transfers in 2018 were done by those with super prime or prime credit, per the CFPB report. This is unsurprising because those with subprime credit -- 619 or below -- and even those with near prime credit might struggle to find any credit card companies willing to work with them.
Their low credit scores indicate that they’ve been irresponsible with money in the past and this makes card issuers hesitant to approve these borrowers for fear that they’ll fail to pay back what they owe. So even if some of these borrowers want to do a balance transfer to pay off their debts, it might not be possible.
But that doesn’t mean they’re out of options. Some personal loans are available to those with near prime or subprime credit, though they typically charge higher interest rates. Still, a personal loan can help you if you’re serious about getting out of credit card debt because you’ll have predictable monthly payments instead of a revolving balance that can keep growing.
These borrowers should also make efforts to improve their credit so that they can gain access to better loans and credit cards in the future. Always pay your bills on time and avoid charging even more to your credit cards. Charging more will make your balance tougher to pay off and increase your credit utilization ratio -- the ratio between how much credit you have available to you and how much you use each month. Ideally, you shouldn’t be using more than 30% of your available credit at a time.
Balance transfers can be a smart way to pay down credit card debt and hopefully as this trend becomes more popular, we will see Americans’ total credit card debt decrease. But as with any financial decision, you must consider a balance transfer carefully. Understand any fees or limitations associated with the balance transfer and be realistic about whether you’ll actually be able to pay back what you owe in time.
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