This guest post was written by Jason Bushey. Jason is a personal finance blogger and the editor of Creditnet.com.
Consolidating your debt with a balance transfer credit card isn’t necessarily a new idea, but it’s still one worth considering in 2013.
Let’s face it, the early months can be a bit of a drag; there’s holiday debt to pay back, taxes to get in order and – in most places – it’s super cold. Sounds brutal, right? Well, it doesn’t have to be. (Though unfortunately the ‘cold’ part is a little out of our hands…)
Applying for a 0% APR balance transfer credit card can help you get on the right path towards debt consolidation while saving you a modest fortune on interest fees. These little gems make your life easier on several different levels.
First, they save you money on interest. Balance transfer credit cards use their 0% interest intro periods – which generally last anywhere from six to 18 months – to entice new consumers and their balances over. If you’re having trouble paying down your credit card debt due to interest fees, then it’s the perfect time to consider a balance transfer.
The process is simple. Simply determine how long it will take to pay down your debt at zero interest, and match up your additional wants and needs (cash back rewards, airline miles, points, etc.) with a credit card that includes all of the above. Apply for and receive your card, contact your new credit card company, transfer the balance (generally at a 3% fee of the total balance being transferred, though fees vary) and voila; now you’re paying zero interest on your old balance AND you’ve consolidated some or (hopefully) all of your debt! Good deal, right?
OK, back to the other ways in which you can benefit from a balance transfer. We’ve touched on the fact that transfers consolidate your debt, but it’s hard to overstate just how helpful that can be. If you’re juggling multiple cards, that means multiple due dates to contend with and a higher risk of missing a payment. Defaulting on a credit card payment is a credit score killer (more on that later), and can have a seriously negative effect on your profile.
So by consolidating some or all of your debt onto one card, you’re directly lowering the risk of hurting your credit score. And speaking of your credit score…
The third way you can benefit from a balance transfer is by opening up a new credit account. Unless you have a half-dozen credit cards in your wallet already (not recommended, by the way), opening a new line of credit and once again showing lenders that you can use credit responsibly will further improve your score.
According to FICO inventors Fair Isaac, new accounts make up 10% of your overall credit score; right away you’re receiving a boost on your profile. Once you begin making payments on your transferred balance, you’ll see your score get bumped up further for a couple of reasons: a.) you’re improving your payment history and b.) you’re paying down your debt interest-free and lowering your credit utilization ratio, aka the amounts you owe in relation to your total available credit line.
Those two FICO score factors – payment history and credit utilization – make up a full 65% of your credit score! So not only are you lowering debt; you’re improving your score, too.
So is there any catch to consolidating your debt with a balance transfer? The answer is, ‘Not really.’ There is a one-time fee to transfer your debt on most cards (Slate(SM) from Chase is the only credit card available on the market today that does not charge a balance transfer fee), which ranges from 3% to 5% of the total balance being transferred. That’s a pretty small price to pay considering you’ll be swiping interest-free with your new card.
Also, the initial pull of your credit score (from your new creditor) will have a minor, negative affect on your score. According to Fair Isaac, that drop is generally five points or less. And finally, if you’re new credit line is on the small side, it’s not recommended that you transfer a huge amount of your existing balance over. In fact, the recommended transfer is 30% or less of the total available credit on your new card. For example, if you have a new card with a $1,000 limit, you should only transfer over $300 or less to keep your credit utilization ratio low on your new card.
While there are a few key things to be aware of when transferring your balance, consolidating your debt with a 0% interest balance transfer card is one of the best ways to get the ball rolling on paying down your debt in the new year.
FYI: I worked at a dead end cubicle job from 2005-2011 for about $30,000 per year. I went self-employed in July 2011 and make between $70,000-$90,000 through blogging, professional pet sitting, hubby's reffing, and our rental home. If you’d like to start your own site (link to my free step-by-step guide), I highly suggest checking out Bluehost (my referral link with a nice discount for you, PLUS a free custom header banner from me!). Please contact me any time at budgetingfunstuff*at*gmail*dot*com with questions or just to brainstorm! I’d love to help!