How to use a balance transfer card for holiday debt

Have you received your credit card bill for December yet? If so, you're not the only one. As this Federal Reserve Board chart shows, Americans accumulate about $30 billion in credit card debt in the last quarter every year – and then attempt to pay it off in the first quarter of the New Year.

The problem is they rarely succeed at paying off the entire balance. By the end of the first quarter every year, roughly $6 billion of revolving consumer credit is still unpaid. Even worse, it usually continues to grow the rest of the year too.

Note: See also How to Choose a Credit Card for tips on finding the right credit card for you. Our partner site CardRatings.com also has articles to help you find the right card be it a cash back credit card or balance transfer credit card. Their Credit Card Comparison Table also allows you to easily search dozens of current credit card offers.

 

A harsh reality made worse

It's never pleasant to face the fact that you may not have budgeted your purchases very well (or at all) during the holidays. But the harsh reality is how quickly debt increases if it isn't paid off completely. And with interest rates on the rise, it can only get worse.

It might not be deferred holiday spending that tripped you up, though. Mistakes happen – especially when you're just starting out – and unexpected events pop up all the time. (Take me, for example – my home heater died today, even though it's only two years old!).

But if you have to put an uh-oh purchase on a credit card – on top of the holiday charges you've already made – you may be wishing you had a way to stretch your budget and pay it all off.

Is a balance transfer credit card the answer?

A balance transfer credit card may be a really good option in this situation; but there is a lot to know about how these offers work. And if you're not clear on all of the terms of the particular card you're interested in, your financial condition could very easily make a turn for the worse. It's not as simple as you might think, so here's what to consider:

  1. Your credit rating. The most attractive balance transfer offers are extended to those with excellent credit. If you have excellent credit, usually in the mid-700s to 850, consider applying for one of these cards. If you are in the lower end of the credit spectrum, however, the offers are usually less generous. Regardless, it's important to know what happens during the introductory period.
  2. Introductory periods. This is where you can really make progress hammering down your debt. Most offers include an introductory period with 0% or a very low interest rate. Most offers I've seen have a 0% promotional period of only six months to a year. What term length you pick may depend on factors such the following points…
  3. How long you need to pay off the debt. Do you just need three months to pay off the balance because you expect a tax refund in April or do you need as much time as you can get because you can only afford $30 a month? Knowing how long it will take to pay off your balance is critical to comparing balance transfer offers, but so is the next item.
  4. Interest rates. Remember that introductory period with 0% interest? Well, that rate is temporary. And it may only apply to the balance you transfer within a certain period of time, not to any new purchases you make with the credit card.
    Make sure you understand how the interest rate changes to know if it even makes sense to move the debt around. Typically, the higher the interest rate on your current debt, the more likely transferring the balance would make sense. Interest rates vary widely between credit card companies too, so you really need to dig into each offer and see which is best for you.
  5. Credit limit. Are you transferring your entire balance from other high-interest debts to simplify your finances and consolidate them onto this one card? A credit card company may only approve a smaller credit limit, which could leave you juggling payments on other debts in addition to this new card. While it may not be the perfect solution, reducing the amount of interest you pay – even if it's only a portion of your debt – might still be worth it.
  6. Balance transfer fees. Any fees you pay to transfer the balance will reduce the amount you could save in interest, so calculate what that amounts to when comparing offers. Most cards I have seen in the recent past had a 3% balance transfer fee and some are as high as 5%; but some have a $0 balance transfer fee for a certain period of time and others don't even have a fee at all.
  7. How payments are applied. This is a big gotcha that most people fail to consider, and it's an expensive one at that. If the credit card company applies your payments to the lowest interest rate balance first and the excess to higher interest-rate balances, uh-oh. That means your payment will be applied to the 0% balance first, allowing new purchases to accrue interest at the much higher rate!

What else matters?


  • Adopting an attitude toward debt. It's easy to get into problems with credit, but I don't believe credit cards are necessarily a problem for everyone. I think it all comes down to the attitude you have toward debt. If you loathe debt, want to be debt-free, and know you have the discipline to stay debt-free, moving debt around with a balance transfer offer can help you pay a balance off as quickly (and inexpensively) as possible.
  • Putting the shovel down. This is your pay-it-off card. Putting new stuff on this card is like digging a deeper hole. Don't do it. Instead, commit to not making any new purchases after the balance is transferred.
  • Staying disciplined to pay it off in time. In other words, don't pursue a balance transfer credit card offer if you have any doubts about your resolve or ability to pay the balance back in time. Be disciplined to get rid of the debt in the allotted time – otherwise, you could be left paying a higher interest rate on your balance.
  • Keeping your credit healthy. A balance transfer credit card offer may be a good way to eliminate debt once and for all, but transferring debt repeatedly from one balance transfer card to another can hurt your credit in the long run. The point is not to keep moving debt around; it is to help you get rid of debt entirely.
  • Reading the fine print. Most cards offer 30 to 60 days to transfer balances; so as soon as you apply for the new card and get approved, set time aside to read the fine print … in its entirety.

Make a repayment plan — and plan for the future

  • Budget to repay the debt as soon as possible. Don't fall into the trap of waiting out the complete 0% period. You never know what unexpected expenses could pop up. Instead, make a plan for how to repay the debt so you don't end up owing money at a huge interest rate.
  • Set up automatic payments. Formalize your plan with automatic bill-pay to make sure each payment is taken care of before you reallocate that money for something else.
  • Monitor your credit card statements. Make sure that you're making progress every month and that no unexpected charges or fees are being added to your balance.
  • Start an emergency or a targeted savings account right away. What helps prevent a debt spiral? An emergency fund! Take this time to work on building your online savings account. Hopefully that will make it so you won't have to go through this again.

You don't have to resign yourself to making payments on an ever-increasing balance. With a little bit of thought, shopping, and commitment, you can reverse the trend line of debt. Better yet, you could start to save for this year's holiday season in advance, build up your emergency fund, or even start working on a new Roth IRA.

Has a balance transfer credit card helped you completely eliminate debt or have you had a card turn into a debt horror story? What tips can you share? What do you think makes a balance transfer a good strategy?

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Money Beagle
Money Beagle
4 years ago

We set aside money every month for the purpose of being able to fully pay off our credit cards after the holiday season. This takes all the worry and having to look at what credit card is the ‘best’ right away!

Karthigan Srinivasan @ StretchADime
Karthigan Srinivasan @ StretchADime
4 years ago

If you are in credit card debt, then you must cut it up, and keep one card for any real emergencies. Then pay off your credit card debt as quickly as possible. In parallel, start saving an emergency fund in a savings account. After you have paid off your credit card, you should stay off from using credit cards for at least 3 years. In these three years, you need to master the art of living below your means. If you have mastered it, then you can start out by using one credit card and evaluate if you have the… Read more »

lmoot
lmoot
4 years ago

As someone who never thought I’d play the balance transfer game, I found myself dealing in twice in 2 years. The first time I did it was in Sept 2014. I’d just got back from visiting family overseas and was only employed PT, having quit my FT job before I left. Even though I had some cash, I funded my trip and the first few months of underemployment on a 6 month promotional 0% interest card. My mindset at the time was that I wanted to avoid dipping into savings at all costs because I didn’t know when I would… Read more »

Financial Samurai
Financial Samurai
4 years ago
Reply to  lmoot

What about spending more time on making money and less time on the balance transfer game?

lmoot
lmoot
4 years ago

Any ideas? I’d need access to it in 2-3 years for a DP on a rental property (if there’s something that can give me near guaranteed returns above the 2.375% I’m getting after the BTs and paying down the mortgage I truly want to know). There are only 24 hours in a day and I already work most of them thanks to a full time (with 10+ hours OT every week), a part time job (20-32 hours/ wk) and I’m living with family while renting my own house out, for additional income so I can have my mortgage paid off… Read more »

lmoot
lmoot
4 years ago
Reply to  lmoot

“to qualify me for *a* mortgage”
(not a second mortgage)

Amy Cooper
Amy Cooper
4 years ago
Reply to  lmoot

That lengthy sentence is the best sentence I have seen in a while–totally makes sense. I wish you luck in your financial stuff, more so you than me. I gave up a long time ago on myself. It is cloudy and cold outside so I am looking at old email and reading and deleting it out. I have a lot of email decluttering to do. I get these postings yet I seldom take the time to read the articles and the comments and then they pile up like mountains. This way I am not spending any money on estate sales,… Read more »

lmoot
lmoot
4 years ago
Reply to  lmoot

Because there are only 24 hours in a day and I already work most of them. I’m open to ideas though. Besides I hardly call 5 min per year a major time investment.

freebird
freebird
4 years ago

I’ve never done a balance transfer because I’ve never carried one. My December statement came in at $30 with a $25 minimum, and I opted to not float (or transfer) the five bucks. I guess I have one tip– never use your credit card to buy gifts. I always give checks (aka completely unrestricted gift cards) which I think are maximum convenience for everyone, even though they’re boring on the surface. If it’s not already out there someone should sell glossy commemorative personalized gift debit cards, or on checks if eventually banks do their canceled check imaging in high res… Read more »

Laura
Laura
4 years ago

I’ve only done a balance transfer once, over a year ago. I have one high-interest rewards credit card for which I always pay off the balance each month, but too many unexpected expenses over a three-month period (and lack of enough funds in the emergencies account to cover them) required this course of action to stave off interest. I did pay about $50 for the transfer; that may have been about the amount of interest I’d have paid to carry the balance one month, but it was an emotional thing as I’d never paid interest on that card before –… Read more »

Steve R.
Steve R.
4 years ago

I have used balance transfer offers in the past before, and they can be very advantageous if used responsibly. It’s really hard to imagine a scenario where, if you are disciplined and all other things are equal, it is anything but a good thing to have a lump sum of cash now that you do not pay any interest on or balance transfer fees for. At the very least, sock the lump sum away in an interest-bearing savings account and pay it off before the introductory APR disappears. A subtle way of following the author’s advice to “budget to repay… Read more »

Phil Danley
Phil Danley
4 years ago

I don’t recommend using a balance transfer unless the commitment is there to not add debt back to the card(s) which were paid off. If the monthly savings is used 100% to pay down the new card’s balance, then this can be a useful technique. Please remember the 0% period is a limited time so be careful, you’re playing with fire! If you don’t pay the balance down you will one day be in worse shape than you are now.

cc
cc
4 years ago

Financial discipline is easy for some and difficult for others. It’s usually easier when you have a good steady income. For those that don’t, the trick is to move towards the steady income rather than running up debt. If you don’t have a good income stream, don’t spend on the superfluities of life; it’s that simple. And somebody already mentioned living below your means. This is the number one rule to financial success: If you can’t afford it, don’t buy it. Matters not the reason (Xmas gifts, personal likes etc). If you don’t have much water in the well, don’t… Read more »

emmers
emmers
4 years ago

We used a balance transfer offer to transfer balances between spouses. I had better credit, and a better balance transfer offer, so we transferred his balance to me, which saved a ton on interest. This also helped when we applied for a mortgage, since it raised his credit score because he then had more available credit. My credit score didn’t drop enough to matter, since they look at the credit score of the spouse with the lowest credit when you do a joint mortgage application.

sam
sam
4 years ago

You can also call up your bank and tell them you plan to transfer the balance and see if they will lower your interest rate. Some will recognizing that its better to collect some interest rather than none if you transfer the balance.

As for holiday expenses, set up your savings account now for 2016 holidays and start funding your account so you don’t take on debt when Christmas comes.

Michael Belk
Michael Belk
4 years ago

I have played the balance transfer game and I lost every time.

Balance transfers are not only the wrong way to pay off debt, but a prolonging of the inevitable problem.

I am still working with my debt however I do see light.

Jennifer
Jennifer
4 years ago

I’m new to the getting out of debt game and so please pardon my question if it has been answered (or completely ridiculous)- my question is in regards to the introductory period term. Let’s say I have $10,000 in debt but the bank only issues me a $5000 credit. Using the Chase Slate card as an example, if I pay down that first $5,000 down within 6 months (of a 15 month 0% APR period) and want to transfer my remaining $5,000, would I be charged an xyz% APR since I’m obviously not within the first 60 days of the… Read more »

lmoot
lmoot
4 years ago
Reply to  Jennifer

Every one I’ve encountered has a similar term…one of mine only allowed within the first 30 days. However usually when they offer 0% on purchases, it counts for any purchase made anytime before the expiration of the offer.

My guess is they prefer you to use the card for purchases so that they can cash in on merchant fees…which they wouldn’t get if you kept maxing the card out with existing debts.

lmoot
lmoot
4 years ago
Reply to  lmoot

Anyway,

even if you could do that, it would make more sense for you to focus on paying down the $5k that is at a higher interest rate, not the one that’s at 0%; just pay the minimum on that until you pay off higher interest debt…but make sure you give yourself time to save/ pay it off before the offer expires (or have an efund that can cover it if you can’t).

Formative Fortunes
Formative Fortunes
4 years ago

I always make sure to not spend more than i can afford, a balance transfer seems like a good option though. Make sure the fee is worth the transfer though!

thomas
thomas
4 years ago

Thanks for the post, just subscribe today,will also introduce my japanese friends to your site too.

Love you guys work!!

Kristi @ Femme Frugality
Kristi @ Femme Frugality
4 years ago

We don’t spend more than we have cash in hand for, especially for gifts. Balance transfer credit cards are a great option for certain individuals looking to consolidate their debt, though. Just be sure to read the fine print and understand the rules of the card.

Liz
Liz
4 years ago

Balance transfer has been a lifesaver when my credit card debts spiralled out of control. Suddenly I found myself $35k in deep debt (I was earning only $4k a month with uncontrolled spending). I decided I want to be debt free and set out to change. I planned my budget, applied for every balance transfer I can to reduce interest charges, collected unwanted clothes from my friends and sold them at flea markets to earn some extra money, did some freelance work, etc. Anything to pay off the debts. I set out to pay as much as I can every… Read more »

Katelyn
Katelyn
4 years ago

Hey GRS,
What’s the deal with the infrequent articles this month?

Linda Vergon
4 years ago
Reply to  Katelyn

Hi Katelyn – and All! Thanks for asking. We’re actually neck-deep in an audit process, and it’s more encompassing than I expected. It’s so that we can ensure that all of the rate information we present on the site is 100% accurate now that the Fed has changed rates. We’re still working on new content, but these administrative tasks are very important and take priority. As I mentioned to Beth the other day, though, if there is something in particular that you’d love to see, I’d be happy to include that in our plans. Thanks for understanding! Best, Linda Vergon… Read more »

Pamela
Pamela
4 years ago

I think in order for a balance transfer to work, you need a lot of discipline. Introductory teaser rates can be detrimental to most people if they don’t have a concrete plan to get out of debt. Most people can get out debt on their own, if they really put their mind to it. I know its possible because I paid off $120,000K in student loans in 2.5 years. Hardest thing to do in my life so far in terms of self-discipline. To see my journey go to http://www.mymoneycounts.org

Allan @practicalsaver
Allan @practicalsaver
4 years ago

I don’t really like the idea of a balance transfer. First, there’s a fee attached to it. A lot of companies tend to charge around 3.5%. Second, people who don’t have control with their credit cards or credit card spending are likely to use the cards whose balanced were transferred to another account.

The only time I would recommend the balance transfer is when the person is really dedicated to not using the card again or use it and pay it off in full.

Jay
Jay
4 years ago

I believe balance transfer cards will work if you have a solid plan and work out the math to pay back your cc debt.

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