Credit card debt is a huge burden, but interest? Interest can create a budgeting disaster. It makes it harder to pay off those cards because it balloons our monthly payments without paying down principal.
So how do you catch up? Many consumers turn to balance transfer credit cards, which may sound like a strange strategy. After all, getting a new credit card to pay off debt may seem counter-intuitive.
But here's how it works: You transfer your balance to this new balance transfer credit card, which comes with a limited-time low or 0% interest rate, giving you time to pay off your debt without getting huge interest charges tacked on.
Before you sign up for a balance transfer credit card, consider these common myths — and the truth behind them.
Myth: I'm always going to have to pay a balance transfer fee
While balance transfer cards do offer a low or no annual percentage rate (APR) for a set period of time (often 12 to 21 months), there is one big catch — the fee you pay to do it. This upfront fee is typically 3% to 5% of your balance, so you'll need to factor this into your budget before getting the card.
Here's the kicker: Not all cards come with this fee. Do your research to compare what each card offers and find the one that works best for your situation.
Myth: Using your balance transfer card for purchases is a good idea
While balance transfer cards are awesome tools to help you pay down debt, they are not ideal for purchases.
The problem with using your new balance transfer card for purchases is two-fold. First, you’re getting further into debt with increased spending. Second, new purchases don't come interest free — and the APRs on these cards tend to be pretty hefty.
Myth: Opening a new balance transfer card will destroy your credit score
Opening a new credit card can impact your credit score in a few different ways. First, credit inquiries (required for approval of new lines of credit) make up 10% of your credit scores, so you'll see a bit of a dip from this.
On the flip side, you should also keep in mind that opening a new line of credit can also raise your score. Utilization — your debt to total credit ratio — makes up 30% of your score, so you will add to your overall credit limit by adding another card to your collection.
The bottom line: The actual act of opening a new credit card will not cause your score to plumit. Paying down your debt? Now that will help boost your score without a doubt. Here are some other ways to raise your credit score.
Myth: You should close old credit cards after transfering a balance
You might be tempted to cut up and close your old credit cards once you transfer a balance, but you’re better off keeping them open. Not only will more open credit improve your utilization rate, but old cards increase the average length of your credit history — age of credit makes up 15% of your score.
Myth: Anyone can qualify for a balance transfer card
While balance transfer cards help people get out of debt, that doesn’t mean you will automatically qualify for one. In fact, you may struggle to score one of the best offers if your credit is less than stellar.
All hope isn't lost if you don't qualify. You can still talk with your credit card issuers to see if they can lower your current APRs to help you pay down what you owe (which would ultimately boost your score and your chances of getting approved in the future).
Myth: A balance transfer will help you get out of debt
While some people believe that simply getting a balance transfer card will get them out of debt, this is absolutely false. While a balance transfer card can help you avoid interest payments, you won’t get out of debt unless you pay your debt off.
Keep in mind that, once you transfer balances to a balance transfer credit card, you’ll have a low monthly minimum payment like you did before. If you only pay the minimum, you may not make much progress on your debts at all.
To get out of debt with a balance transfer, you have to focus your efforts on paying as much as you can before the card's introductory offer expires. If you don’t, you’ll wind up in a similar place to where you started – with a mountain of debt and a high interest rate.