Consolidating Your Credit Card Debt
One common term for consolidating credit card debt is
balance transfer. In effect, the balance from one or more of
your credit cards is transferred to another card. This can
happen when you open a whole new credit card account and
then transfer existing balances to the new card or by
transferring other existing balances onto another existing
open account. Either way, the logic is that you shouldn’t be
paying higher interest rates on multiple accounts
when you could pay a lower interest rate on one card.
Are you considering consolidating? Use the “Should I Consolidate my Credit Cards? Calculator” on Bank of America’s website to help you decide if consolidation is the right choice for you.
If you have high balances on higher interest rate cards and decide that consolidating your credit card debt is the right decision for you, you should carefully research balance transfer offers just as you would comparison shop for a credit card. Check balance transfer offers against your needs and against each other. Look at the terms of any reduced interest rates. Many balance transfer offers have introductory or “teaser” rates, so you’ll pay a lower rate in the beginning, but the rate will increase after a defined amount of time.
Here are some things to consider:
- Will your current or new credit card issuer charge a fee - either a flat fee or a percentage - for transferring your balance? Are there any general fees associated with the new card?
- Would you pay a fee for terminating your existing credit card account?
- What is the interest rate for transferred balances? How long is that rate good for? What will the new rate be when the current one expires? Will I realistically be able to pay off the transfer amount before the interest rate increases? If I miss or am late with a payment, will the interest rate go up automatically?
- On the new card, is there a higher interest rate for new purchases than for the transferred balance? And how are payments applied to the promotional balance transfer amount versus new purchases? If I have a balance transfer amount at a lower interest rate and continue to charge new purchases at a higher interest rate, will my payments go toward the balance transfer amount first before being applied to the new purchase balance? (Almost all of the time, by the way, the answer to this question is, yes. Credit card issuers often apply your payment to the lower-interest rate balance, in this case the transfer balance, before applying money to the higher rate balance. So if you are continuing to charge other purchases on the card that you have transferred a balance to, those purchases are going to sit and accrue interest until you get your balance transfer paid off…which leads us to our next question…)
- When might I realistically be able to pay off the card at my current rate of spending?
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