How to Save Thousands on Credit Card Interest
Have you ever looked at your credit card bill and noticed that over half your monthly payment is going straight to interest? Let’s end that.
My credit card debt story is pretty classic. I went to college and got a credit card and almost immediately maxed it out. I did my best to pay off the minimum and maybe a little extra each month, but not very hard. Then when I needed more money, I’d open up a new card and do the exact same thing.
Repeat ad nauseam over the next seven or eight years, add in an economic recession, and a degree in screenwriting and I woke up to over $12,000 in credit card debt. My biggest blessing was that the credit card companies hadn’t given me higher limits or I would certainly have been in much deeper debt.
Cut to me, as a late twenty-something, trying to navigate the murky waters of paying down debt, raising my credit score, and attempting this whole adulting thing. I started aggressively paying down debt, but it felt like I was rowing a boat with one oar and no compass.
Why wasn’t I making progress?
I was making payments on all my cards, but I couldn’t figure out why I wasn’t making much progress, and then I took a closer look at my statements.
On one of my cards, I made a monthly payment of about $150. It was a stretch and it was only a few dollars above or at the minimum, but I wanted to work on getting that balance down. One day I noticed the Interest Charged line on my statement.
$106.70
You read that right. I was paying over $100 in interest on that ONE card every single month!
Meaning my “heroic” $150 monthly payment was really only about $43. It’s not difficult to do the math of that equation.
I wasn't going to make much progress on my debt with those numbers. I couldn’t afford to pay more money on that card, and that is when I learned about the magic of balance transfers.
Don’t you worry, I’m not breaking the statute of secrecy, there is no actual magic involved. Merely credit card companies incentivized to get your business, but you can use that to get those debt paying odds in your favor.
What Is A Balance Transfer?
A balance transfer is when you take a balance on one credit card and move it to another. Typically, you will do this if there is a promotional interest rate/APR for a set period of time so that you can pay less interest on the same balance.
How to Transfer a Balance
There are a couple of ways to transfer a balance. The first option is to transfer a balance to an existing card, preferably with a zero dollar balance. The second option is to open a new credit card.
You may have received letters or messages from your credit card company about a promotional balance transfer offer, with a lower rate for a set period of time. For example, one of the cards that I paid off offered me a no-fee transfer with a significantly lower APR for 18 months.
If you do have any cards, it may be worth looking into this option. However, if you do not have any cards with a zero balance, then I recommend considering opening a new card.
There are a ton of credit cards that offer promotional APRs on balance transfers, sometimes even 0% interest for up to 21 months. How they determine your eligibility is based greatly on your credit, so if your credit is up to snuff (generally about 650 or higher), then this could be a great route for you.
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If your credit score is under 650, check out the below article to find out how to fix that.
If you are interested in opening a new card, please research the card to make sure that once you’ve paid it off, it’s a card you’d be interested in keeping. Depending on your priorities that may mean travel rewards, high cashback rates, or no annual fee.
CreditCards.com has a good resource of credit cards with good balance transfer options. Their recommendations are based on general information.
If you’d like a more customized recommendation, then I suggest you open a free Credit Karma account. They can also help you figure out where your credit is and your approval odds for each card.
What to Consider When Looking at Balance Transfer Offers
Promotional APR
This rate should be lower than your current credit card rate(s).
Promotional Term
Do your best to transfer what you think you can reasonably pay off during the promotional period.
While you can do another balance transfer if you can’t pay it off before the promotional period ends, be mindful that each new card you open brings down your average credit age and can ding your credit score.
Balance Transfer Fee
Generally speaking, there will be a fee to transfer your balance. This is usually 3–5% of the amount transferred, so on a $1,000 transfer, it would be $30–50.
Make sure that the fees and promotional APR will actually work in your favor depending on how quickly you are able to pay off the balance by using CreditCard.com’s Balance Transfer Calculator.
The Fine Print of Balance Transfers
The sneaky trap the credit card companies want you to fall into is transferring a balance and then spending additional money on that card.
More often than not, if you transfer a balance and then use it to buy something, even a dollar section purchase at Target, that will end your promotional APR on your entire balance. If that happens, everything will revert to the regular APR on the card.
If you transfer a balance, I urge you to do whatever you have to, even if it’s cutting up the card or putting it in an ice block in the freezer to NOT use that card until the entire balance transferred has been paid off. After that, if you feel you can use the card responsibly, please do so.
As for my credit cards, I did transfer that balance to another card and I paid under $7 a month in interest until I successfully paid it off.
More on that here:
Paying down your credit card debt doesn’t have to feel like an endless slog and you can make significant progress on paying it down with a balance transfer.
Go out and find your perfect balance transfer and let me know how much you’re going to save in interest by transferring your balance!
Kate LaChapelle is a freelance writer based in Los Angeles. She is passionate about Frankenstein, developing writers, and helping people take charge of their personal finances. This article was originally published on Reel Cents on March 21, 2019.
