One Way to Zap Credit Card Debt? Open another credit card

IIt might sound completely counterintuitive, right?

If credit cards are what got you into debt in the first place, why on earth would you go ask for another one when you’re trying to pay off that debt? You could risk making things worse.

It certainly could happen. But if you have a plan – and strategically apply for the right kind of new credit card – this can actually be one of the best debt relief tools available to you. In this case, what you want is a credit card balance transfer.

They aren’t as ubiquitous right now as they were just a few years ago, and to qualify for them you’ll likely need good to excellent credit (FICO score of 690 and above). But they can give you a big boost as you work to get out of debt. Here’s how.

How credit cards with balance transfer work

With a balance transfer card, you transfer debt from a credit card that charges a high interest rate to a card with a low interest or 0% promotional period. You can then make payments on that debt, at low or no interest, regardless of the length of the promotion period. Some cards waive interest for about a year, while others offer a low introductory annual percentage rate or 0% for almost two years.

You will usually need a balance transfer fee for this, ranging from 3% to 5% of the amount you are transferring. But it may be worth paying.

Let’s say you have a $ 5,000 balance on a card that charges you an APR of 17%. Transferring the balance to a new card with no interest for 18 months and a 3% balance transfer fee would save you $ 550, compared to leaving the debt on the old card.

After the end of the APR introduction period, the card’s current “normal” APR will come into effect. If you have an outstanding balance at that time, you will start to owe interest at that higher rate, but only on what you have left to pay. If your plan is to erase all of the debt before the interest rate goes up, you can calculate how much you have to pay every month so that you can achieve this goal.

Nerd tip: The real introductory 0% APR offers you find on balance transfer cards are different from deferred interest offers you may see on some store credit cards. With these kinds of offers, if you don’t pay off your entire balance at the end of the promotion, you will have to pay retroactive interest on the full amount originally borrowed.

Choose a balance transfer card

When choose a balance transfer credit cardOne of the main things to consider is how long you have to pay off your balance at 0% or low interest. But as you weigh your options, there are a few more questions to ask yourself:

  • Will I be eligible for a balance transfer card? Again, most balance transfer cards require good to excellent credit to qualify. This may change depending on market conditions.
  • What are the card balance transfer fees? If a card charges 3% of the transferred balance, that adds $ 30 for every $ 1,000 you transfer. (No-fee balance transfer cards are rare, but there are a handful.)
  • How long do I have to transfer a balance after I receive my new card? To qualify for the introductory APR, you may need to transfer your balance within a certain time frame, such as 60 to 120 days. Review the terms and conditions of the card you choose so you know the deadline.
  • Can I get a balance transfer card issued by the same bank as my current card? It is possible, but banks usually do not allow you to transfer a balance from one card account to another from that same bank.
  • What balance can I transfer? Often times, the amount you can transfer from your old card is dictated by the credit limit you can claim on the new card. It is possible that the credit limit on your balance transfer card is lower than your total credit card debt, but you usually won’t know what credit limit you will get until you have applied for and approved the card.

A few words of caution

Balance transfer cards can be a useful tool when you want to save money while getting rid of debt. But keep these things in mind:

  • The minimum card payment is still due each month. In most cases, to keep the promotional APR on a balance transfer card, you still need to make at least the minimum monthly payment. Ideally, if you can pay more than the minimum you owe, it speeds up your overall debt repayment schedule.
  • Balance transfer cards do not prevent “new” spending. Daily spending doesn’t stop while you aggressively pay off a balance, and balance transfer credit cards let you keep spending even when you’re in debt. This would of course be added to your total balance due.
  • Card Introduction APR may not apply to all transactions. Some balance transfer cards have separate (and higher) APRs for purchases, which means that by using them to pay for everyday items, you could re-dig the very hole you’re trying to get out of.

More from NerdWallet

Sara Rathner writes for NerdWallet. Email: [email protected] Twitter: @sarakrathner.

The article One Way to Zap Credit Card Debt? Opening another credit card originally appeared on NerdWallet.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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