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Don’t Even Think About Doing a Balance Transfer Until You’ve Done These 3 Tasks

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Image source: Upsplash/The Motley Fool

If you have credit card debt, repaying it can be a challenge thanks to the high interest rate your cards are most likely charging you. The average interest rate on credit cards is 21.47%, and with such a high rate, a lot of money has to go toward covering interest each month before you even make a dent in your principal.

That’s why a balance transfer can be a great way to make repayment easier. A balance transfer literally involves transferring your balance from one card to another (hence the name).

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Typically, you’ll get a new balance transfer credit card that offers a temporary 0% APR on transferred balances within a limited time after opening your card. You’ll be able to move the balance of your current debt over — often by paying a small transfer fee of around 3% to 5% — and then get to keep that 0% rate for around 12 to 15 months. During that time, every dollar of your payment will go toward reducing the amount owed. This should make it much easier to free yourself of credit card debt for good.

However, while balance transfers can make payoff easier, they aren’t always the right financial move for everyone. If you’re considering one, don’t even think about moving forward until you’ve accomplished a few key tasks first.

1. Confirm you can live within your means and handle credit responsibly

When you transfer a balance, you typically open a new card account and move the debt from your existing card over. This means you are freeing up credit on those cards and you have a larger total credit line to work with between the new card and the old ones.

This can be a huge problem if you aren’t confident you can live within your means, since you now have access to even more credit and could run up a bigger balance. Say, for example, you open a balance transfer card with a $5,000 limit and transfer over a $2,000 balance and a $3,000 balance, both of which were on cards you’d maxed out. Since you’ve freed up those credit lines, if you aren’t living within your means, there’s a risk you’d max them out again and end up owing a total of $10,000.

Consider whether you are currently living on a budget, have an emergency fund, and can keep your spending below your income. If not, try to work on those things before getting a balance transfer so you can be confident you can trust yourself with new access to credit.

2. Calculate how much you’ll have to pay to bring your transferred balance to $0

The next key step is to make sure that you have an idea of how much your payments will be each month to pay off the transferred balance before the 0% rate expires. For example, if you’re transferring over $5,000 to a balance transfer card with a 0% APR for 15 months, you’d need to pay about $333.33 per month.

If you can’t pay off the full amount in time, you’ll have to start paying interest at the standard rate on the balance transfer card once the promotional rate has expired. This may not be a big deal if the rate is the same or lower than the interest you were being charged on your current cards. But if it’s a lot higher and a big balance remains at the end of the 0% time period, then you could end up worse off over time.

It’s easy to calculate how much you have to repay each month — just divide the balance you’re transferring by the number of months the 0% rate is offered. If you don’t think you can pay back that amount before the promotional period ends, then see if your projected go-to rate will be higher than on your current cards. If so, you may not want to move forward if you still expect to owe a lot once you get to that higher rate.

3. Shop around for balance transfer card offers

Finally, the last step is to shop around for the right balance transfer card. You can do this by checking out our list of best balance transfer cards and seeing what each offers. Pay attention to the transfer fees as well as the number of months you have before interest starts being charged, so you can decide which card is right for you.

By taking care of these tasks, you can get a balance transfer card at a great rate and ideally use this tool to make real progress toward paying off your debt for good.

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