Money

How balance-transfer credit cards save you money as you pay off debt

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If you're in revolving credit card debt, you may want to consider getting a balance-transfer card. They allow you to transfer a balance from a card with a high interest rate to one with a low interest rate, giving you an opportunity to pay off debt faster and at a lower cost.

Considering how much they can save you in interest payments, CompareCards.com Senior Industry Analyst Matt Schulz calls them a "godsend."

But most Americans who could benefit from a balance-transfer card have never used one, according to a survey from CompareCards.com by Lending Tree, while most millennials in debt don't even understand how they work.

How balance-transfer credit cards work

The average American borrower has a credit card balance of $5,644. If you maintain that balance and pay interest on it at a rate of 15 percent, roughly the national average, you'd pay about $850 in interest every year. If you started paying off the card at $200 per month, it would take 36 months and cost $1,360 in interest payments to wipe out the debt.

Now, let's say you transfer the balance to the U.S. Bank Visa Platinum card, our No. 1 choice for the best balance-transfer card overall, which has an introductory offer of 0 percent annual percentage rate for 20 months on any balance you transfer to the card. Assuming you transfer the entire balance of $5,644 to this card and pay it off at the same rate, it will take 30 months and cost you only $265 on top of the principal to pay it off.

That's accounting for the balance transfer fee, too, which tacks on an additional 3 percent of your balance, or $170 in this case, to your debt. It's also assuming your variable APR after the introduction period is 11.74 percent, the lowest the U.S. Bank Visa Platinum offers.

What if you use the American Express EveryDay, which requires no balance transfer fee and has 15 months of no interest? Assuming you qualify for a 14.74 percent APR, it would take you 30 months to pay off the balance and cost you only $260 on top of the principal.

Paying off the average credit card debt

Credit card
Total interest you'll pay
Months to pay it off
Current card with no introduction offer $1,358 36 months
US Bank Visa Platinum $265 30 months
American Express EveryDay $260 30 months
Source: CNBC Make It

How payments are structured

Keep in mind when you use a balance-transfer card to make new purchases, it can get complicated if the no-interest introductory offer only applies to balance transfers and not new debt. In these cases, you will have different interest rates on the balance you transferred over and the balance you accrue with new purchases.

When you make a minimum payment — which is usually 1 to 3 percent or around $25 — your credit card issuer will put it toward your balance with the lowest interest rate. If you're still in the introductory period, it will go toward the balance you transferred onto the card with a 0 percent APR. Any payment above the minimum will go toward your balance with the highest interest, thanks to the Credit CARD Act of 2009.

To offer an example, let's say your new card has no introductory APR offer for purchases and requires a minimum payment of $25. If you put $500 on it one month and then go to pay that off, your first $25 would go toward the balance you transferred over from another card, not the balance you just accumulated making new purchases.

In order to pay off what you borrowed that month in full and avoid a potentially high purchase APR, you'd have to pay off the amount you spent on the card plus the minimum payment — in this case, $525. Any additional payment would then go toward the balance with 0 percent APR that you transferred over.

If you're someone paying hundreds to thousands per year in interest on revolving credit card debt, you may want to consider consolidating your debt onto a low-interest credit card. As long as you use the card appropriately, making payments on time and not adding to your balance with purchases you can't afford, the move can help you become debt-free faster.

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