A few years ago, my husband and I found ourselves in the same position as many American households — we had thousands of dollars in credit card debt and weren’t quite sure how to manage it. The one thing we did know is that we didn’t want to continue living paycheck to paycheck for the rest of our lives. At the top of 2016, we challenged ourselves to find strategies that would help us eliminate $13,000 in credit card debt within 18 months or less.
We did tons of research and determined that, if used correctly, balance transfers had the potential to help us reach this goal a lot faster.
Some more background
- We were paying more than $150 per month in interest on all of our credit cards combined.
- We paid double the minimum payment each month, but this barely moved the needle on our total credit card balances because interest was accruing daily and we continued to add new purchases “here and there,” which started to add up.
- Based on this pace, our estimated payoff date was 2022 — that’s six years to get rid of $13,000!
- We made well over the median income of our town.
Before transferring balances
We evaluated all our options. Around the time we set out to take control of our finances, we received a ton of balance transfer offers from our current credit card companies as well as others that we hadn’t banked with before. In the end, we chose to transfer balances from two credit cards onto an existing credit card because: 1) we didn’t want to open another credit card and 2) there was enough of a limit on the card we transferred to for this plan to make sense. This last point is important because you can transfer only as much as your credit limit allows. In our case, we transferred $5,000 onto a card with a limit of $15,000 that had an existing balance of $6,000.
We understood the fine print. We were aware of the requirements, transfer fees and the length of the promotional period. Some things to keep in mind:
- To be approved for a balance transfer, you will need a good or excellent score. Although we had a considerable amount of credit card debt, we had a credit score in the mid-700’s largely because we were never late or missed payments and our credit utilization ratio wasn’t outrageous. This meant that our odds of being approved were high.
- There’s a transfer fee involved. In our case, the fee was 3 percent of the balance transferred. This amount was added to the total balance and we did not have to pay anything out of pocket.
- It is important to keep making minimum payments until the balance transfer is finalized. It took several weeks for the transaction to be completed and we were careful to continue making payments on all cards until the balances were transferred onto one card.
- The length of the promotional period has a huge impact. I will elaborate on this point below.
During the balance transfer promo period
We committed to meeting the payoff deadline. The balance transfer offer we chose gave us exactly 18 months to enjoy 0 percent APR on all balances transferred. After 18 months, we would be charged an APR of 28 percent on any remaining amounts. This deadline served as a huge motivator for us to pay our debt off well in advance of this date.
We stopped abusing credit cards. We approached the balance transfer process as an opportunity to change our relationship with money and improve our spending habits. We stopped charging large purchases to our credit card unless we knew that we could afford to pay for them in cash, immediately. We didn’t want to waste the chance to take control of our financial situation by adding to our balances and used the balance transfer as a mechanism to become more focused.
We used the interest savings to pay down our balances quicker. This is the most effective way to use balance transfers to your advantage. In our case, we were saving about $90 a month in interest. Instead of using that money to eat out, we added it to our debt payoff amount each month to build momentum.
We threw all our extra cash onto the card. In addition, by scaling back our lifestyle temporarily, we were able to find hundreds of dollars each week to put into paying off debt. This level of focus allowed us to achieve our credit card debt payoff goal in just 6 months — an entire year earlier than we anticipated!
After paying off credit card debt
We stopped carrying balances on our credit cards. In a sense, successfully paying off our debt was like achieving a weight loss goal and we were committed to keeping our weight off for good. Therefore, we’ve committed to maintaining our good money habits going forward.
We watched our credit scores increase. Although we had scores in the good-to-excellent range to begin with, by extinguishing our debt, those have skyrocketed. This puts us in a good position in the future to achieve one of our financial goals to purchase a new home in a few years.
When used properly, 0 percent balance transfers have the potential to help you to stay focused, reform your relationship with credit and accelerate your debt payoff goals.
Kim Galeta is a personal finance and lifestyle blogger at KimGaleta.com.
She has more than eight years of experience in the financial services industry and holds an MBA in finance and corporate strategy.