In case you haven't heard, we're in debt. As consumers we collectively owe more than $840 billion to credit-card companies (not to mention billions more to auto lenders and mortgage companies, in addition to the federal government's $16 trillion tab). It's time to do something about it.
Unfortunately there's no magic bullet, but one very useful tool arrives in many of our mailboxes almost weekly, in the form of credit-card offers urging you to transfer debt from another card. The best cards provide an initial interest-free period and charge minimal fees, giving those who switch the chance to pay off what they owe at a lower interest rate. (Read more: What to Expect From Interest Rates This Year)
Not every offer is worth taking, but the right balance-transfer card could save the average indebted household — which has a credit-card balance of around $6,700 — upward of $1,000 in finance charges and fees, while shortening the timetable for debt freedom. You just need to know what you're doing.
A Sweet Spot for Balance Transfers
The value of these offers has increased steadily since the end of the Great Recession, as delinquency rates have fallen and banks have recognized the importance of replenishing their customer bases with low-risk consumers.
That's why it's a particularly good time to consider transferring a credit-card balance, because zero-percent terms are at peak length. Currently the average zero-percent, balance-transfer card won't start charging you interest until the 11th month, according to Card Hub data. That's nearly four percent longer than a year ago.
But while initial rewards bonuses (the other type of goodies the cards use to entice you to sign) continue to get better, the length of zero-percent introductory terms has hit a wall, remaining unchanged for the past couple of quarters. It's unlikely that offers are going to get much better than they are now.
Last year also marked the return of the so-called "free" balance-transfer credit card — offering an initial zero-percent term and charging neither an annual fee nor a balance-transfer fee. This is a better deal than run-of-the-mill cards that charge a fee equal to two to four percent of any balance transferred, on top of standard service fees that diminish the amount you're able to save.
There are a few cautions that come with transferring debt:
You need excellent credit Roughly 50 percent of consumers have excellent credit, but the half of all consumers who won't qualify for a worthwhile balance-transfer offer should focus instead on improving their credit standing in order to qualify as quickly as possible.
High regular rates take effect when intro terms end It's imperative that you pay off your transferred balance before or very soon after the zero-percent introductory term concludes. After that time, the average balance-transfer card jacks its rates up to 16.60 percent; some cards charge as much as 25.99 percent.
Don't be tempted to continue spending When people know they aren't going to be charged interest, they'll often overspend with the idea that they'll just catch up later. Don't do that. Use your zero-percent rate to cut into your debt, not maintain it. And don't count on zero-percent offers being around when your initial interest-free period ends. That's how a lot of people got burned during the recent downturn.
Risk of credit score damage Each time you apply for a new credit card, your credit standing takes a slight ding, which lasts for about six months. That's really not too big of a deal unless you're applying for a home loan or otherwise need the best possible credit score in the short term. (Read more: Bieber to Promote a Prepaid Card)
When Shopping, Don't Forget Fees
Make sure when comparing offers to find the most attractive combination of zero-percent term length and balance-transfer fees. Most cards charge three percent for transfers; if you can't find a non-fee card, pick one with the longest zero-percent term. (At the moment, that's the Citi Diamond Preferred Card, with its 18-month zero percent term and 3 percent balance transfer fee.) But you'll save an average of $200 if you pick a 15-month term with no three percent fee, such as the Slate Card from Chase.
Many of these no-fee arrangements are available only as introductory offers. But don't hesitate to cancel your existing account to take advantage of a new card with the same lender. All's fair when it comes to paying down what you owe responsibly, and saving.