How to Pay off your Debt with 0% Balance Transfer
When credit card balances -- or any high interest debt -- begins to pile up on you, it's time to consider the options for getting your finances under control. In many cases, a good choice to pay down debt, plastic or otherwise, is to transfer it with a low-interest credit card offer. But you need to know the best way to use a zero percent credit card balance transfer, so you don't end up with more debt.
Current Balance Transfer Offers
The tighter lending rules brought on by the economic recession put an end to most of the old "no interest-no fees" balance transfer offers. Transfer fees are now commonly anywhere from 2 percent (rare) to 5 percent of the balance. One exception is Chase, the only major bank currently offering zero percent balance transfers with no transfer fee. A limited time offer on its Slate card requires you to make your balance transfer within the first 30 days to avoid a fee. The card offers zero percent interest on your balance for up to 15 months. After the 15 months, the APR goes to 12.99 -- 22.99 percent (variable), based on your creditworthiness. The Barclaycard® Ring MasterCard® also offers balance transfers with no transfer fee, but the balance APR is 8 percent, not zero.
Whether you qualify for those offers or choose another from the wide selection of transfers with fees, be careful to check the fine print for any unusual rules on card usage or lurking surprise fees. For the end of the zero percent promotion you'll be given a "go to" rate telling you how much interest you'll pay each month. Typically, longer promotional periods lead to higher "go to" APRs. Your new card could also cause a sudden dip in your credit score, which could hurt if you expect to be shopping in the ensuing six months for the best rates on a mortgage or an auto loan.
Percentage of Monthly Credit Card Payments Toward Interest
|Time to pay off||2 years 8 months||11 months||7 months||7 years 4 months||2 years||1 year 2 months||2 years 4 months||11 months||7 months|
|Total principal paid||$5,000||$5,000||$5,000||$10,000||$10,000||$10,000||$5,000||$5,000||$5,000|
|Total interest paid||$1,215||$430||$274||$7,508||$1,841||$1,084||$557||$217||$141|
|Portion of monthly payment paid toward prinicipal||80%||92%||95%||57%||84%||90%||90%||96%||97%|
|Portion of monthly payment paid toward interest||20%||8%||5%||43%||16%||10%||10%||4%||3%|
|Monthly payment to pay off in 1/2 the time||$351||$875||$1,295||$307||$988||$1,511||$378||$855||$1,273|
Plan Out How you Will Pay off Your Debt
The most basic and practical use of zero percent balance transfer offers is to pay down high interest credit card balances more quickly. If you've run up a large credit card balance that is carrying an interest rate of eight, 14, 17 percent or even higher, transferring that balance to a new card with a zero percent rate can really help you to get a head start on paying down that debt. Be sure to set aside that credit card after transferring the balance until all of the debt is gone.
But paying off the original debt is only half the battle. Be sure to have a plan ready for the eventual payoff of your balance transfer as soon as you execute the transfer. It can be as simple as dividing the balance transferred by the number of months you have the zero percent APR -- 12, 15, or 18 months. But you'll need to know your source of funds for payments, plot out a realistic schedule of your payments, and then exercise the discipline to stick to your payoff resolution.
Transfers are not strictly for credit card balances. Another use for zero percent balance transfer offers is to get ahead on college student loans, home equity lines of credit, and even car loans. This can be a little tricky because the loan must be paid off or transferred to another zero percent offer when the promotional period ends, otherwise you might get stuck with an extremely high "go to" APR at the end of the introductory period.
Also, many people are unable to save for an emergency fund. A rolling zero percent balance transfer can be a low-cost way to handle a financial emergency -- if you are disciplined. Do not spend the money unless it is truly an emergency, and make sure you pay off the amount or roll it over before the promotional period expires.
Credit Cards: Different APRs on Different Balances
|Credit Card Interest Rates||15.99% APR on Purchases, 0% APR on Balance Transfers||0% APR on Purchases, 15.99% APR on Balance Transfers||15.99% APR on Purchases, 4.99% APR on Balance Transfers||15.99% APR on Purchases, 15.99% APR on Balance Transfers|
|Interest Charged on Purchase Principal||$65.71||$0||$65.71||$65.71|
|Balance Transfer APR||0%||15.99%||4.99%||15.99%|
|Balance Transfer Principal||$5000||$5000||$5000||$5000|
|Interest Charged on Balance Transfer Principal||$0||$65.71||$20.51||$65.71|
|End of Month Principal Owed||$10,000.00||$10,000.00||$10,000.00||$10,000.00|
|Total Interest Charged on End of Month Principal||$65.71||$65.71||$86.22||$131.42|
|End of Month Balance Owed||$10,065.71||$10,065.71||$10,086.22||$10,131.42|
|Total Monthly Payment||$500||$500||$500||$500|
|- Portion of Monthly Payment Toward Lowest-APR Balance||$165.71||$165.71||$186.22||$231.42|
|- Portion of Monthly Payment Toward Highest-APR Balance||$334.29||$334.29||$313.78||$268.58|
|New Purchase Principal||$4,731.42||$4,834.29||$4,751.93||$4,815.71|
|New Balance Transfer Principal||$4,834.29||$4,731.42||$4,834.29||$4,815.71|
|New Total Balance||$9,565.71||$9,565.71||$9,586.22||$9,631.42|
More Ways You Can Pay off Your Debt
There are other methods with varying price tags to accomplish the same goal.
Lifetime balance transfer credit cards: For card customers trying to pay off high-interest credit card debt, lifetime low interest balance transfers, offered by Discover Card and others, may be substantially cheaper than the other personal loan alternatives out there. While lifetime balance transfer credit card rates may be cheaper than the alternatives, they do require the card account holder to exercise careful repayment habits to continuously benefit from the perpetually low rates. Failure to do so will result in substantially higher rates and penalty fees.
P2P lending: For those with less-than-stellar FICO credit scores or credit reporting histories, online peer-to-peer (P2P) lending services have emerged as viable balance transfer and personal loan alternatives to traditional banks. Peer-to-peer services like LendingClub.com and Prosper.com, offer a way for individuals to lend by way of an online matching system -- complete with personal profiles and blog messages written by prospective borrowers.
Secured credit card debt consolidation: A home equity line of credit (HELOC) loan offers a much lower interest rate than most personal loans via banks or ordinary non-promotional credit card offers. However, this option means the debt is secured by your home. Ordinarily in the event of a failure to pay back the credit card loan (a credit card default), the card issuer can not immediately go after your home to satisfy the unpaid debt. But once the debt consolidation is made via a HELOC loan, the home is subject to possible seizure for non payment.
Personal loans via banks and local credit unions: Those with good to excellent credit scores may be able to apply and get approved for a personal loan from their local bank or community credit union. However, bear in mind that while these type of loans for credit card consolidation purposes are generally widely available to most borrowers, but they frequently demand interest rates that are higher than available home equity line of credit solutions.
Debt consolidation counseling: If your credit score or credit report history is simply too damaged to utilize the available low interest credit card debt consolidation alternatives above, seek affordable credit counseling services from accredited non profit organizations to help you consolidate your existing debt in a manageable way via fee waivers and lifestyle changes.
So, there are other options to pay down debt. But if your choice is to transfer it with a credit card offer, follow our suggestions on the best way to use a zero percent credit card balance transfer.